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’re evaluating two issue alternatives: A semiannual coupon bond with a 8 percent coupon rate and a zero coupon bond. Your company’s tax rate is 40 percent. Assume a par value of $1,000.

a-1. How many of the coupon bonds would you need to issue to raise the $38 million? (Do not round intermediate calculations and round your answer to the nearest whole number a-2. How many of the zeroes would you need to issue? (Do not round intermediate calculations and round your answer to the nearest whole number

b-1. In 20 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

b-2. What if you issue the zeroes? (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

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

Explanation / Answer

a-1) Number of the Coupon Bonds that would be needed to issue to raise the $38 million:-

= 38000000 / 1000

= 38000

Number of the Zero Coupon Bonds that would be needed to issue to raise the $38 million:-

= Amount to be raised / Price of Zero Coupon Bond

Price of Zero Coupon Bond = 1000 / (1 + 0.08)20

Price of Zero Coupon Bond = 1000 / (1.08)20

Price of Zero Coupon Bond = $ 214.55

Number of the Zero Coupon Bonds that would be needed to issue to raise the $38 million:-

= 38000000 / 214.55

= 177115 (approx)

b-1) The Company's repayment in 20 year if you issue the coupon bonds = 38000 * (1000 + 80)

= 38000 * 1080

= $ 41040000

b-2) The Company's repayment in 20 year if you issue the zero coupon bonds = 177115 * 1000 = 177115000.

Conclusion:-

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