Question

Suppose your company needs to raise $53 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 4.6 percent, and you're evaluating two Issue alternatives. A semiannual coupon bond with a coupon rate of 4.6 percent and a zero coupon bond. Your company's tax rate is 24 percent. Both bonds will have a par value of $2,000. a-1. How many of the coupon bonds would you need to issue to raise the $53 million? a-2. 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.) b-1. In 25 years, what will your company's repayment be if you issue the coupon bonds? (Do not round Intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) b-2. What if you issue the zeroes? (Do not round Intermediate calculations and enter your answer In dollars, not millions of dollars, e.g., 1,234,567.) C. Calculate the aftertax cash flows for the first year for each bond. (Do not round Intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) a-1. Number of coupon bonds a-2. Number of zero coupon bonds b-1. Coupon bonds repayment b-2. Zeroes repayment Coupon bonds inflow Zero coupon bonds Outflow

Answer 1

Answert a-1) Caleulate the number of bonds Number of coupon bonds - Issue amount/current price of - $53,000,000sec bond. - Number of coupon bonds = 26,500. bonds. a-2) calculate the current price of the bond. Bond prices par value It Interest rate ex years adeoܫܲ ܢܢ ܚ 1 + 2046 Jexes - $2000 14.023750 Boud Price = $ 641.5762969 calculate the number of sexo bonds to raise $53 Million. Neember of coupon bonds, Issue amount/current price of bond $53,000,000) 4641.58 :: Number of coupon bonds - 82,608.56. 6-1) Calculate the company's repayment for coupon bonds after 25 years. Bepayment = (price of bond & Coupon payment) x No. of Coupon $2000+ [$2000x (467/6371x 26.500 bonds =($ 2000+ $46) +-26500 :: Re payment = $54,219,000. The company's repayment for Bero bonds after 25 years. Repayment a price of bonds & Number of coupon bonds • $ 2000 x 82,608.56 :: Repayment = $165,217,120 - bonds !

c) calculate the after tax cash flow, .- Bond price par vake [it Interest rateqexyears . 1 + 0.04670x24 >$200/6.023348 Bond price = $ 671.42.81997, Interest expense e value of boud at end of istyear - válve of boud at the beginning of 1st year. ... :$ 671.4981997- $641,5762969 = $29.8519028 After tax Cash out flow Interest expense & No. of bonds & Tax rate! -$29.8519028 * $ 165, 217120% 24% Afler taxi cash out flows $ 1,183,690,897.71