Suppose your company needs to raise $55 million and you want to issue 25-year bo
ID: 2720479 • Letter: S
Question
Suppose your company needs to raise $55 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a 7 percent coupon rate and a zero coupon bond. Your company’s tax rate is 30 percent. Assume a par value of $1,000.
In 25 years, what will your company’s repayment be if you issue the coupon bonds? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.
What if you issue the zeroe payment bonds? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Calculate the firm’s aftertax cash outflows for the first year for each bond. (Enter your answers as positive values in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
Suppose your company needs to raise $55 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a 7 percent coupon rate and a zero coupon bond. Your company’s tax rate is 30 percent. Assume a par value of $1,000.
Explanation / Answer
Coupon Bonds 55,000,000/ 1000(assuming each bond is 1000) = 55,000
Zero Coupon Bonds is a little more difficult. See previous answer for zero coupon bonds. What you need to do is figure out PV = FV(1+k)^n.
PV = 55,000,000
k = 7%
n = 25
Therefore FV =418,674,027.35
Prasent vale of future 1000
=1000/ (1+r)K
=1000/(1+0.07)30
=1000/7.6122
=131.37
Number of bond issue
=55,000,000 /131.37
=418674
Alternatively you can calculate by following ways
418,674,027.35 / 1000
...therefore you would need 418674 bonds.
b) Coupon Bond you would need 55,000,000 to retire. Zero coupon bond would nee
what will your company’s repayment be if you issue the coupon bondsd
=418674*1000
=418,674,000
C)
Calculate the firm’s aftertax cash outflows for the first year for each bond
Coupon Bond
55000
Multiply
Interest Paid
70
(1000*70)
Per year Interest exp
3850000
After tax effect
1-0.35
2502500
Coupon Bond
55000
Multiply
Interest Paid
70
(1000*70)
Per year Interest exp
3850000
After tax effect
1-0.35
2502500
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