Question
Suppose your company needs to raise $42 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond
Suppose your company needs to raise $42 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 7.1 percent, and youre evaluating two issue alternatives: a 7.1 percent semiannual coupon bond and a zero coupon bond. Your companys tax rate is 25 percent. a. How many of the coupon bonds would you need to issue to raise the $42 million? How many of the zeroes would you need to issue? (Do not round intermediate calculations. Round your coupon bond answer to the nearest whole number, e.g., 32 and your zero coupon bond answer to 2 decimals, e.g., 32.16.) b. In 30 years, what will your companys repayment be if you issue the coupon bonds? What if you issue the zeroes? (Do not round intermediate calculations and enter your answers in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.) c. Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firms aftertax cash outflows for the first year under the two different scenarios. (Input a cash outflow as a negative value and a cash inflow as a positive value. Do not round intermediate calculations and enter your answers in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.)
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