Suppose your company needs to raise $14 million and you want to issue 27-year bo

Question

Suppose your company needs to raise $14 million and you want to issue 27-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 8 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 34 percent.

You will need to issue _________________ of the zeroes to raise the $14 million. (Round your answers to the nearest whole number. (e.g., 32))

In 27 years, your company's repayment will be $______________ if you issue the coupon bonds. (Do not include the dollar sign ($).)

If you issue the zeroes, your company's repayment will be $____________. (Do not include the dollar sign ($). Do not round your intermediate calculations. Round your answers to the nearest whole number. (e.g., 32))

Your aftertax cash outflow for the first year will be $______________ if you issue the coupon bonds, and a cash inflow of $___________ if you issue the zeroes. (Do not include the dollar signs ($). Do not round your intermediate calculations. Round your answers to the nearest whole number. (e.g., 32))

Suppose your company needs to raise $14 million and you want to issue 27-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 8 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 34 percent.

Explanation / Answer

a) 14 million dollars of coupon bonds since coupon rate = discount rate

14 million dollars of zero coupon bonds

b) in 27 years the principal repayment will be 14 million dollars

Zero coupon repayment = 14*(1+0.08) ^27 = $111.8328

e) i) after tax cash outflow = coupon * (1 - tax rate) = 14 *0.08* ( 1 -.34) = 739200

ii) after tax cash flow = 0 as no coupon paid on zero coupon bonds

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