Suppose your company needs to raise $55 million and you want to issue 25-year bo
ID: 2631547 • Letter: S
Question
Suppose your company needs to raise $55 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent, and youre evaluating two issue alternatives: A 7 percent semiannual coupon bond and a zero coupon bond. Your companys tax rate is 30 percent.
In 25 years, what will your companys repayment be if you issue the coupon bonds? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What if you issue the zeroes? (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. (Enter your answer 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 $55 million?
Explanation / Answer
a)
assuming the face value of the bond be 1000.
observe that to raise 55 million the number of bonds = 55000000 / 1000
=55000.
a2)
calclulate teh amount of present value as follows:
PV=FV/(1+i)m
=1000/(1+0.07)25
=$184.25.
calculate the number of 0 coupon bonds as follows:
55000000/ 184.25
=298508.28
b1)
observe that if the company issues coupon bonds
therefore calculate the value as 1.07*55000000
=58850000
b2)
observe that if the company issues 0 coupon bonds
calclulate the bond as 298508.80*1000
=298508800
c) calclulate the amount of coupon bonds after tax as follows:
=5000*70*(1-0.30)
=5000*70*0.70
=$2695000
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