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 youre evaluating two issue alternatives: a 5 percent annual coupon bond and a zero coupon bond. Your companys tax rate is 40 percent.

Required:

1. (8 marks) Compare the two alternatives, considering:
   1. the number of bonds that would need to be issued
   2. repayment obligation
   3. aftertax annual cash flows for the first year
2. Under what conditions would you choose a zero coupon bond over an annual coupon bond?