Question

Suppose your company needs to raise $36 million and you want to
issue 20-year bonds for this purpose. Assume the required return on
your bond issue will be 8.5 percent, and you’re evaluating two
issue alternatives: an 8.5 percent semiannual coupon bond and a
zero coupon bond. Your company’s tax rate is 35 percent. Both bonds
would have a face value of $1,000.

**a.** How many of the coupon bonds would you need to
issue to raise the $36 million? **(Do not round intermediate
calculations and round your answer to the nearest whole number,
e.g., 32.)**

Number of coupon bonds

How many of the zeroes would you need to issue?

Number of zero coupon bonds

Coupon bonds repayment $

What if you issue the zeroes?

Zero coupon bonds repayment $

Calculate the firm’s aftertax cash outflows for the first year under the two different scenarios.

Coupon bond cash flow | $ |

Zero coupon bond cash flow | $ |

Answer #1

a | Number of coupon bonds | 36,000 | =36000000/1000 |

Number of zero coupon bonds | 190,258.93 | =36000000/PV(8.5%/2,20*2,,1000)*-1 | |

b | Coupon bonds repayment | $ 37,530,000 | =36000*1000+36000000*8.5%/2 |

Zeroes repayment | $ 190,258,930 | =190258.93*1000 | |

c | Coupon bonds | -$1,989,000.00 | =-36000000*8.5%*(1-35%) |

Zero coupon bonds | $ 1,093,758.75 | =36000000*((1+8.5%/2)^2-1)*35% |

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