Financing East Coast Yachts Expansion Plans with a Bond Issue Input area:

Given Information:

Years to maturity 20

Required return 7.50%

Amount needed $50,000,000

Face value $1,000

Coupon rate 7.50%

Tax rate 21%

Year bond is called 7

Spread above Treasury 0.40%

Treasury rate at call 4.80%

Treasury rate at call 8.20%

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Questions to be solved:

Dan is considering whether to issue coupon-bearing bonds or zero coupon bonds. The YTM on either bond issue will be 7.5%. The coupon bond would have a 6.5% coupon rate. The company's tax rate is 21%.

2) How many of the coupon bonds must East Coast Yachts issue to raise $50 million? How many zeroes must it issue?

Price of coupon bond #

of coupon bonds needed _____

Price of zero coupon bond

# of zeroes needed _____

3) In 20 years, what will be the principal repayment due if East Coast Yachts issues the coupon bonds? What if it issues the zeroes?

Repayment of coupon bonds ____

Repayment of zeroes ____

4) What are the company's considerations in issuing a coupon bond compared to a zero coupon bond?

Year 1 interest payments:

Pretax coupon payment

Aftertax coupon payment ______

Value of zero in one year

Zero coupon growth

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.

Please show all work in excel calculations