Suppose your company needs to raise $38 million and you want to issue 20-year bo

Question

Suppose your company needs to raise $38 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you%u2019re evaluating two issue alternatives: A 8 percent semiannual coupon bond and a zero coupon bond. Your company%u2019s tax rate is 40 percent.

In 20 years, what will your company%u2019s 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 $38 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you%u2019re evaluating two issue alternatives: A 8 percent semiannual coupon bond and a zero coupon bond. Your company%u2019s tax rate is 40 percent.

Explanation / Answer

PV= 40PVIFA(4%,40)+1000PVIF(4%,40)= $1000

Number of coupon bonds= 38000000/1000= 38000 bonds

PV of zero coupon bonds= 1000PVIF(4%,40)= $208.29

Number of zero- coupon bonds= 38000000/208.29= 182438.78 or 182439 bonds

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