A company needs to raise $20 million and is considering issuing 5-year bonds for this purpose. Assume the required return on the bond issue will be 10 percent, and the company is evaluating two-issue alternatives: A semi-annual coupon bond with a 6 percent coupon rate and a zero-coupon bond. The tax rate is 35 percent. How many of the coupon bonds would you need to issue to raise the $20 million and how many of the zeroes need to be raised? In 6 years, what will the company’s repayment be if you issue the coupon bonds? What if you issue the zeroes?
A company needs to raise $20 million and is considering issuing 5-year bonds for this purpose. Assume the required return on the bond issue will be 10 percent, and the company is evaluating two-issue alternatives: A semi-annual coupon bond with a 6 percent coupon rate and a zero-coupon bond. The tax rate is 35 percent. How many of the coupon bonds would you need to issue to raise the $20 million and how many of the zeroes need to be raised? In 6 years, what will the company’s repayment be if you issue the coupon bonds? What if you issue the zeroes?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A company needs to raise $20 million and is considering issuing 5-year bonds for this purpose. Assume the required return on the bond issue will be 10 percent, and the company is evaluating two-issue alternatives: A semi-annual coupon bond with a 6 percent coupon rate and a zero-coupon bond. The tax rate is 35 percent.
How many of the coupon bonds would you need to issue to raise the
$20 million and how many of the zeroes need to be raised?
In 6 years, what will the company’s repayment be if you issue the coupon bonds? What if you issue the zeroes?
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