Suppose your company needs to raise $45 million and you want to issue 30-year bo

Question

Suppose your company needs to raise $45 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 6 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. a-1. How many of the coupon bonds would you need to issue to raise the $45 million? Number of coupon bonds 45,000 a-2. How many of the zeroes would you need to issue? (Round your answer to 2 decimal places. (e.g., 32.16)) Number of zero coupon bonds b-1. In 30 years, what will your company's repayment be if you issue the coupon bonds? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Coupon bonds repayment b-2. What if you issue the zeroes? (Enter your answer in dollars, not millions of dollars, i.e 1,234,567.) Zeroes repayment Calculate the aftertax cash flows for the first year for each bond. (Enter your answer in dollars, not c. millions of dollars, i.e. 1,234,567.) Outflow Coupon bonds Zero coupon bonds Inflow

Explanation / Answer

a1) No. of coupon bonds = 45,000,000 / 1,000 = 45,000

a2) PV of zero coupon bond = 1,000 / (1 + 6%/2)^(30 x 2) = $169.73

No. of zero coupon bonds = 45,000,000 / 169.73 = 265,122.14

b1) In 30 years, repayment = Principal + Semi-annual coupon

= 45,000,000 + 45,000,000 x 6%/2 = 46,350,000

b2) Repayment = No. of zero coupon bonds x Par Value

= 265,122.14 x 1000 = 265,122,140

c) Outflow for Coupon bond = 45,000,000 x 6% x (1 - 35%) = 1,755,000

Inflow for zero coupon bond = 45,000,000 x 6% x 35% = 945,000

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