Suppose your company needs to raise $37 million and you want to issue 30-year bo
ID: 2771960 • Letter: S
Question
Suppose your company needs to raise $37 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a coupon rate of 6 percent and a zero coupon bond. Your company’s tax rate is 35 percent. Both bonds will have a par value of $1,000.
In 30 years, what will your company’s repayment be if you issue the coupon bonds? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What if you issue the zeroes? (Do not round intermediate calculations and 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. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)
a-1. How many of the coupon bonds would you need to issue to raise the $37 million?Explanation / Answer
Coupon Bonds 37,000,000/ 1000(assuming each bond is 1000) = 37,000
Zero Coupon Bonds is a little more difficult. What you need to do is figure out
PV = FV(1+k)^n.
PV = 37,000,000
k = 6%, semiannual = 6%/2 = 3%
n = 30 * 2 = 60
Therefore FV = 37,000,000/(1+3%)^60
= 6,280,124
6,280,124 / 1000 ...therefore you would need 6280 bonds.
b) Coupon Bond you would need 15,000,000 to retire. Zero coupon bond would need 6,280,124
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.