Question

Suppose your company needs to raise $45 million and you want to issue 30-year bonds for this purpose with a par value amount of $1000. Assume the required return on your bond issue will be 6%, and you're evaluating two issue alternatives: a 6% annual coupon bond and a zero-coupon bond. Your company's tax rate is 35% a-1. How many of the coupon bonds would you need to issue to raise the $45 million? Number of coupon bonds a-2. How many of the zeroes would you need to issue? (Round the intermediate calculations and the final answer to 2 decimal places.) Number of zero coupon bonds b-1. In 30 years, what will your company's repayment be if you issue the coupon bonds? (Enter the answer in dollars. Omit S sign in your response.) Coupon bonds repayment b-2. What if you issue the zeroes? (Enter the answer in dollars. Round the il decimal places. Omit sign in your response.) calculations and the final answer to 2 Zeroes repayment c. Calculate the firm's aftertax cash flows for the first year under the two different scenarios. (Round the intermediate calculations and the final answers to 2 decimal places. Omit $ sign in your response.) Cash flow of the coupon bonds Cash flow for teroes Click to select) (Click to select)

Answer 1

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W v * ENG 00-09 07-03-2020 24 CP985 - X for a a CK CL CM CN co CP Q CR as a 983 984 985 986 987 1000 FACE VALUE years YTM 30 6.0% (annual coupon bond] 988 AMOUNT NEEDED 45000000 989 990 991 OPITON 1 COUPON 6.0% 992 993 994 AS COUPON RATE AND YTM ARE SAME BONDS WILL BE ISSUED AT PAR NO OF COUPON BONDS NEED TO ISSUE = a-1 45000000/1000 = 45000 OPTION 2 ZERO COUPON BOND PRICE 174.11 (=PV(CL987,CL986,,-CL985)] a-2 NO OF ZERO COUPON BONDS NEED TO ISSUE = 450000000/174.11 = 258457.10 995 996 997 998 999 1000 1001 1002 1003 1004 1005 1006 45000 X 1000 = PRINCIPAL LAST COUPON = 45000000 X 6% COUPON BONDS REPAYMENT 45000000 2700000 47700000 b-1 YIELD SPOT AFN BANKING NOTE Sheet251 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... :

W v . 1x = 00:10 ENG 07-03-202024 ENG Z CP1003 - fix X со с ск с см CN со СР CQ CR CSA 1002 1003 45000 X 1000 = PRINCIPAL LAST COUPON = 45000000 x 6% COUPON BONDS REPAYMENT 45000000 2700000 47700000 b-1 IN ZERO COUPON BOND, THERE IS NO INTEREST SO AMOUNT OF REPAYMENT = 258457.10 X 1000 = b-2 258457103 (taken no of zero coupon bonds without rounding] COUPON PAYMENT AFTER TAX 45000000 *6% *(1-0.35) = 1755000 1004 1005 1006 1007 1008 1009 1010 1011 1012 1013 1014 1015 1016 1017 1018 1019 1020 1021 1022 1023 1024 1025 IN CASE OF ZERO COUPON BOND, NO INTEREST IS PAID SO WE HAVE TO CALCULATE PRICE AT THE ISSUE TIME $ 174.11 PRICE AT THE END OF THE YEAR $184.56 [=PV(CL987,29,,-CL985)] THIS DIFFERENCE IS NOTHING BUT CASH FLOW FOR COMPANY AS TAX DEDUCTIBILITY (184.56-174.11)* 258457.10*(0.35) = 945000.00 COUPON BOND CASH FLOW ZERO COUPON BOND CASH FLOW OUTFLOW INFLOW -1755000.00 945000.00 (taken no of zero coupon bonds without rounding] YIELD SPOT AFN BANKING NOTE Sheet2 S1 S3 CLEAN PRICE $10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... |