Suppose your company needs to raise $48 million and you want to issue 30-year bo
ID: 2771870 • Letter: S
Question
Suppose your company needs to raise $48 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.)
Suppose your company needs to raise $48 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.
Explanation / Answer
Number of coupon bonds = 48,000,000/1000 = 48000
Price of Zero coupon Bond = 1000/(1+6%)^30 = $ 174.1101309
Number of Zero coupon bonds = 48,000,000/174.1101309
Number of Zero coupon bonds = 275,687.58
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.)
Zeroes repayment = 275,687.57632*1000 = 275,687,576.32
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 bond = 6%*48000000*(1-35%) = -1872000
Zero Coupon bond (Tax Saving) = 6%*48000000*35% = $ 1008000
a-1. How many of the coupon bonds would you need to issue to raise the $48 million?Related Questions
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