Your company needs to raise $44 million to finance a new factory. You’re evaluat

Question

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different 20-year bonds to raise these funds: a coupon bond with an annual coupon rate of 8 percent; and a zero coupon bond. Your company’s tax rate is 40 percent. Both bonds will have a par value of $1,000 and a  required annual return of 8 percent with semi-annual compounding.

In 20 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, i.e. 1,234,567.)

What is the repayment if you issue the zeroes? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Calculate your company's total after-tax cash flow during the first year for each type of bond (don't include the initial amount raised). Don't forget to adjust the cash flow for taxes. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different 20-year bonds to raise these funds: a coupon bond with an annual coupon rate of 8 percent; and a zero coupon bond. Your company’s tax rate is 40 percent. Both bonds will have a par value of $1,000 and a  required annual return of 8 percent with semi-annual compounding.

Explanation / Answer

a-1 Face Value of Bond $1,000 Semiannual coupon payment $40 (1000*0.08)/2 Number of semiannual period 40 (20*2) Required semiannual interest 4% Price of bond at the time of issue $1,000 Number of coupon bonds to be issued                  44,000 (44000000/1000) a-2 Zero Coupon Bond: Price of bond at the time of issue= Present Value of $1000 today = $              208.29 1000/(1.04^40) Number of Zero Coupon Bonds to be issued                211,245 (44000000/208.29) b-1 Repayment for coupon bonds in 20 years $44,000,000 Coupon bond repayment $44,000,000 b2 Repayment if zero coupon bonds are issued: Number of bond                211,245 Repayment per Bond $1,000 Zero Bond repayment 211244907.63 (1000*211245) c After tax Cash flow during first year Coupon bonds interest payment $        3,520,000 ($40*2*44000) Total After tax cash flow= $        2,112,000 (3520000*(1-0.4) Cash flow for zero coupon bond $0

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