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? (Do not
round intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
Number of zero coupon bonds
b. In 20 years, what will your company’s repayment
be if you issue the coupon bonds? (Enter your answer in
dollars, not millions of dollars, e.g., 1,234,567. Do not round
intermediate calculations and round your answer to the nearest
whole number, e.g., 32.)
Coupon bonds repayment
$
What if you issue the zeroes? (Enter your answer in
dollars, not millions of dollars, e.g., 1,234,567. Do not round
intermediate calculations and round your answer to the nearest
whole number, e.g., 32.)
Zero coupon bonds repayment
$
c. Assume that the IRS amortization rules apply
for the zero coupon bonds.
Calculate the firm’s aftertax cash outflows for the first year
under the two different scenarios. (Input a cash outflow as
a negative value and a cash inflow as a positive value. Enter your
answers in dollars, not millions of dollars, e.g., 1,234,567. Do
not round intermediate calculations and round your answers to 2
decimal places, e.g., 32.16.)
| Coupon bond cash flow | $ |
| Zero coupon bond cash flow | $ |
| 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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