Suppose your company needs to raise $36.8 million and you want to issue 23-year

Question

Suppose your company needs to raise $36.8 million and you want to issue 23-year bonds for this purpose. Assume the required return on your bond issue will be 9.3 percent, and you’re evaluating two issue alternatives: a 9.3 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent.

How many of the coupon bonds would you need to issue to raise the $36.8 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 23 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).)

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).)

Suppose your company needs to raise $36.8 million and you want to issue 23-year bonds for this purpose. Assume the required return on your bond issue will be 9.3 percent, and you’re evaluating two issue alternatives: a 9.3 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent.

Explanation / Answer

a) How many of the coupon bonds would you need to issue to raise the $36.8 million? (Do not round intermediate calculations. Enter the whole number for your answer, not millions (e.g., 1,234,567).) Ans) If the Bond price is $100 then we have to issue .368 million bound are to be issue. b) 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).) Ans) If the bond price is $100 and it is zero coupen bond so we have to issue at disscount and redeem at $100 then issue price is $12.36. Required amount 36.8 1000000 $        36,800,000 Number of bound               2,977,346 Bounds should be issue at price of $12.36 3) 'In 23 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).) Redeemtion price at par it is $100 4) 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).) Ans) The redeemtion price of the bound is $100 5) 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).) Expenses First option First year expense 36.8 $       3.42 Million Second Option first year expenditure Total Expeses/Number of years 2977346 (100-12.36) 87.64 260934603 $        11,344,983 $    11.34 Million

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