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Q3.b. Suppose your company needs to raise $65 million and you want to issue 20 year bonds for this purpose. Assume the required return on
Q3.b. Suppose your company needs to raise $65 million and you want to issue 20 year bonds for this purpose. Assume the required return on your bond issue will be 4.9%, and you're evaluating two alternative issues: (1) a semi-annual coupon bond with a coupon rate of 4.9%; and (2) a zero-coupon bond. The tax rate is 21%. Both bonds will have a par value of $1,000. i. How many of the coupon bonds would you need to issue to raise the $65 million? How many of the zeroes would you need to issue? ii. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? iii. Based in your answers in parts (i) and (ii), provide explanations why would you ever want to issue the zeroes? To answer, calculate the firm's after-tax cash outflows for the first year under the two scenarios. Assume the Tax Office's amortization rules apply for the zero-coupon bonds
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