Suppose your company needs to raise S36.1 million and you want to issue 21-year

Question

Suppose your company needs to raise S36.1 million and you want to issue 21-year bonds for this purpose. Assume the required return on your bond issue will be 8.6 percent, and you're evaluating two issue alternatives: a 8.6 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. Requirement 1: How many of the coupon bonds would you need to issue to raise the S36.1 million? (Do not round intermediate calculations. Enter the whole number for your answer, not millions (e.g., 1, 234,567).) How many of the zeroes would you need to issue? (Do not round intermediate calculations. Enter the whole number for your answer, not millions (e.g., 1, 234,567). Round your answer to 2 decimal places (e.g., 32.16).) In 21 years, what will your company's repayment be if you issue the coupon bonds? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1, 234,567).) What if you issue the zeroes? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1, 234,567). Round your answer to the nearest whole dollar amount (e.g., 32).) Requirement 3: Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm's aftertax cash outflows for the first year under the two different scenarios. (Do not round intermediate calculations. Input a cash outflow as a negative value and a cash inflow as a positive value. Enter your answers in dollars, not millions of dollars (e.g., 1, 234,567). Round your answers to 2 decimal places (e.g., 32.16).)

Explanation / Answer

(a)

Working for calculating current price of one bond:

(b)

Mo. Of Bonds to be issued = Required proceeds/Issue price of one Bond = 36100000/657.83 =                  54,877 Thus, total 54,877 bonds to be issued.

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