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 coupon rate of 8 percent and a zero coupon bond. Your company’s tax rate is 40 percent. Both bonds will have a par value of $1,000.

  

  

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.)

b-2.

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.)

  Zeroes repayment $ c.

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.)

  Coupon bonds    $   Zero coupon bonds    $

Explanation / Answer

b-2.

Required rate of return = 8%

Repayment after 20 years = 38000000* 1.08^20 = $177116371

c.

After tax cash flows under semi annual 8% Bonds = Cash inflow - Interest [1- tax rate] = 38000000 - 304000[1-0.60]

                                                                                = 38000000 - 304000*0.40

                                                                                = $37878400

After tax cash flows under zero coupon bonds = $38000000

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