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Suppose your company needs to raise $40 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond
Suppose your company needs to raise $40 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 5.7 percent, and you are evaluating two issue alternatives: a 5.7 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 21 percent. A. If you choose to issue coupon bonds, how many of the coupon bonds would you need to issue to raise the $40 million? What if you choose to issue zero coupon bonds? (4 marks) B. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zero coupon bonds? (4 marks) C. Based on your answers in part (A) and (B), do you prefer to issue coupon bonds or zero coupon bonds? (2 marks)
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