Suppose your company needs to raise $41.7 million and you want to issue 25-year
bonds for this purpose. Assume the required return on your bond issue will be 6.7
percent, and you're evaluating two issue alternatives: a 6.7 percent semiannual coupon
bond and a zero coupon bond. Your company's tax rate is 22 percent.
a. How many of the coupon bonds would you need to issue to raise the $41.7
million? How many of the zeroes would you need to issue? (Do not round
intermediate calculations. Round your coupon bond answer to the nearest whole
number, e.g., 32 and your zero coupon bond answer to 2 decimals, e.g., 32.16.)
b. In 25 years, what will your company's repayment be if you issue the coupon
bonds? What if you issue the zeroes? (Do not round intermediate calculations and
enter your answers in dollars, not millions, rounded to the nearest whole number,
e.g., 1,234,567.)
c. Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the
firm's aftertax cash outflows for the first year under the two different scenarios. (Input
a cash outflow as a negative value and a cash inflow as a positive value. Do not
round intermediate calculations and enter your answers in dollars, not millions,
rounded to 2 decimal places, e.g., 1,234,567.89.)
a. Number of coupon bonds
Number of zero coupon bonds
b. Coupon bond repayment
Zero coupon bond repayment
c. Coupon bond cash flow
Zero coupon bond cash flow
