Chapter 8 Financing East Coast Yachts Expansion Plans with a Bond Issue Input area: Years to maturity 20 Required return 7.50% Amount needed $50,000,000 Face value $1,000 Coupon rate 7.50% Tax rate 35% Year bond is called 7 Spread above Treasury 0.40% Treasury rate at call 4.80% Treasury rate at call 8.20% Output area: Price of coupon bond # of coupon bonds needed Price of zero coupon bond # of zeroes needed Repayment of coupon bonds Repayment of zeroes Year 1 interest payments: Pretax coupon payment Cash in or outflow Aftertax coupon payment Value of zero in one year Zero coupon growth Cash in or outflow Zero coupon bond During the life of a bond, the zero generates cash inflows to the firm in the form of the interest tax shield of debt. Make whole price Make whole price