Suppose your company needs to raise $43 million and you want to issue 30-year bo

Question

Suppose your company needs to raise $43 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re evaluating two issue alternatives: A 6 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent.

In 30 years, what will your company’s repayment be if you issue the coupon bonds? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

What if you issue the zeroes? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Calculate the aftertax cash flows for the first year for each bond. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Suppose your company needs to raise $43 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re evaluating two issue alternatives: A 6 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent.

Explanation / Answer

Answer:

1. Calculation of number of coupon bonds to be issued:

The required rate and the coupon rate on the bond is same 6%, hence the bond shall be issued at par. Assuming the par value of the bond is $1000.

Hence the Number of bonds to be issued = $43,000,000 /$1000

= 43000 Bonds

2. Calculation of number of ZERO coupon bonds to be issued:

Price of the zero coupon bond = Par value of the Bond * PVF (30 years , 6%)

= 1000*0.1741

= $174.11

3. Calculation of company’s repayment for the coupon bonds:

= Par value of bonds

= 43000 bonds * $1000

=$43,000,000

4. Calculation of company’s repayment for ZERO coupon bonds:

= Par value of bonds

= 43000 bonds * $1000

=$43,000,000

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