Suppose your company needs to raise $17 million and you want to issue 11-year bo

Question

Suppose your company needs to raise $17 million and you want to issue 11-year bonds for this purpose. Assume the required return on your bond issue will be 10 percent, and you're evaluating two issue alternatives: a 10 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 31 percent.

a. You will need to issue __________of the coupon bonds to raise the $17 million.

b. You will need to issue __________of the zeroes to raise the $17 million. (round 2 decimal places)

c. In 11 years, your company's repayment will be $____________if you issue the coupon bonds.

d. If you issue the zeroes, your company's repayment will be $_____________.

Explanation / Answer

Current price of coupon bonds

Copon payment = 10*1000/2= 50

Current price of coupon bonds = 50/1.05 + 50/1.05^2 + 50/1.05^3 ......50/1.05^22 + 1000/1.05^22 =$1000

Current price of zero coupon bond = 1000/1.05^22 =$341.85

a. No of bonds to issue = 17000000/1000= 17000

You will need to issue 17000 __________of the coupon bonds to raise the $17 million

b. No of bonds to issue = 17000000/$341.85= 49,729.43

You will need to issue 49,729.43_________of the coupon bonds to raise the $17 million

c. Repayment of coupon bond = 17000*(1000+50) =$17,850,000

In 11 years, your company's repayment will be $17,850,000 if you issue the coupon bonds

d. Repayment of zero coupon bond =49,729.43*(1000) =$ 49,729,430.00

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