Question

Suppose your company needs to raise $30 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 7.5 percent, and you're evaluating two issue alternatives: a 7.5 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent Requirement 1: (a) How many of the coupon bonds would you need to issue to raise the $30 million? (Do not round intermediate calculations. Enter the whole number for your answer, not millions (e.g., 1,234,567).) Number of coupon bonds (b) How many of the zeroes would you need to issue? (Do not round intermediate calculations. Enter your answer in dollars, not millions (e.g., 1,234,567). Round your answer to 2 decimal places (e.g., 32.16).) Number of zero coupon bonds Requirement 2: (a) In 20 years, what will your company's repayment be if you issue the coupon bonds? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) Coupon bonds repayment (b) What if you issue the zeroes? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to the nearest whole dollar amount (e.g., 32).) Zero coupon bonds repayment

Answer 1

price of the coupon bond par value as having coupon and same return = $1,000 a-1) number of coupon bonds 30000.00 [30000000/1000 Price of the zero bond |a-2) $229.34 1000/(1.0375^40) number of zero bonds 130811.36 b-1) $31,125,000.00 in 21 year repayment: |(30000000*0.0375) +30000000 b-2) $130,811,362.77 [130811.36 x 1000] zeroes repayment c) after tax cash flows: outflow] -$1,462,500 coupon [-30000000*7.5%*(1-0.35) ] zero coupon bond inflow] $802,265.63 (((1000/1.0375A38)-(1000/1.0375^40) )*(0.35)) *130811.36