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Suppose your company needs to raise $20 million and you want to issue 25 year bonds for this purpose. Assume the required return on your
Suppose your company needs to raise $20 million and you want to issue 25 year bonds for this purpose. Assume the required return on your bond issue will be 5 percent and you're evaluating two issue alternatives: a 5 percent annual coupon bond and a zero coupon bond. Your company's tax rate is 40 percent.
Required:
- (8 marks) Compare the two alternatives, considering:
- the number of bonds that would need to be issued
- repayment obligation
- aftertax annual cash flows for the first year
- Under what conditions would you choose a zero coupon bond over an annual coupon bond?
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