Suppose your company needs to raise $36 million and you want to issue 25-year bo
ID: 2772218 • Letter: S
Question
Suppose your company needs to raise $36 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 you’re evaluating two issue alternatives: A semiannual coupon bond with a coupon rate of 7 percent and a zero coupon bond. Your company’s tax rate is 30 percent. Both bonds will have a par value of $1,000.
a-2.
How many of the zeroes would you need to issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b-1.
In 25 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.)
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
$
I only need help with a2 through c.
Suppose your company needs to raise $36 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 you’re evaluating two issue alternatives: A semiannual coupon bond with a coupon rate of 7 percent and a zero coupon bond. Your company’s tax rate is 30 percent. Both bonds will have a par value of $1,000.
Explanation / Answer
Solution.
The difference between a zero-coupon bond and a regular bond is that a zero-coupon bond does not pay coupons, or interest payments, to the bondholder while a typical bond does make these interest payments. The holder of a zero-coupon bond only receives the face value of the bond at maturity. The holder of a coupon paying bond receives the face value of the bond at maturity but is also paid coupons over the life of the bond.
a-2. How many of the zeroes would you need to issue.
In this question Zero coupan issue price not given.
In genral Zero-coupon bonds are issued at a large discount, known as deep discount,
company needs to raise $36 million.
Par value of $1,000
No of zero coupan bond = 36,000,000 / $1,000
= 36,000 Bond
B.1.
B.2.
If company issue Zero coupan bond for 36 million.
Than componay have no any liability of pay interest on Bond annualy .Company only liable to pay par value of Bond at the date of maturity of Bond.
Benifit and losse may be calculated when Zero coupan Bond issue price known.
C.
In this Question this is not clear that what amount of flow we have to Find either cash in-flow or cash out-flow?
Let we find Total cash out flow of ompany in a year.
For coupan Bond =
Effective rate of intrest for coupan bond = 7.12% Annualy
Tax Rate is = 30%
So intrest Expense is point of View of Tax = 7.12% x .30 = 2.13%
= 7.12% - 2.13% = 4.984%
Cash flow After Tax = 36,000,000 x 4.984% = $1,794,240
For Zero Coupan Bond No any Cash out flow during the year because no any interest payble on Zero coupan Bond Durin the Maturity Period.
Year Bond Amount Rate Interest 1 $36,000,000 7.12% $ 2,563,200.00 2 $36,000,000 7.12% $ 2,563,200.00 3 $36,000,000 7.12% $ 2,563,200.00 4 $36,000,000 7.12% $ 2,563,200.00 5 $36,000,000 7.12% $ 2,563,200.00 6 $36,000,000 7.12% $ 2,563,200.00 7 $36,000,000 7.12% $ 2,563,200.00 8 $36,000,000 7.12% $ 2,563,200.00 9 $36,000,000 7.12% $ 2,563,200.00 10 $36,000,000 7.12% $ 2,563,200.00 11 $36,000,000 7.12% $ 2,563,200.00 12 $36,000,000 7.12% $ 2,563,200.00 13 $36,000,000 7.12% $ 2,563,200.00 14 $36,000,000 7.12% $ 2,563,200.00 15 $36,000,000 7.12% $ 2,563,200.00 16 $36,000,000 7.12% $ 2,563,200.00 17 $36,000,000 7.12% $ 2,563,200.00 18 $36,000,000 7.12% $ 2,563,200.00 19 $36,000,000 7.12% $ 2,563,200.00 20 $36,000,000 7.12% $ 2,563,200.00 21 $36,000,000 7.12% $ 2,563,200.00 22 $36,000,000 7.12% $ 2,563,200.00 23 $36,000,000 7.12% $ 2,563,200.00 24 $36,000,000 7.12% $ 2,563,200.00 25 $36,000,000 7.12% $ 2,563,200.00 Total interest paid in 25 year $ 64,080,000.00 Par value of Bond $36,000,000 Payment during 25 year. $ 100,080,000.00Related Questions
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