Suppose your company needs to raise $35.8 million and you want to issue 23- year bonds for this purpose. Assume the required return on your bond issue will be 8.3 percent, and you?re evaluating two issue alternatives: a 8.3 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. Requirement 1: (a) How many of the coupon bonds would you need to issue to raise the $35.8 million? (b) How many of the zeroes would you need to issue? Requirement 2: (a) In 23 years, what will your company's repayment be if you issue the coupon bonds? (b) What if you issue the zeroes? Requirement 3: Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm's aftertax cash outflows for the first year under the two different scenarios.
Suppose your company needs to raise $35.8 million and you want to issue 23- year bonds for this purpose. Assume the required return on your bond issue will be 8.3 percent, and you?re evaluating two issue alternatives: a 8.3 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. Requirement 1: (a) How many of the coupon bonds would you need to issue to raise the $35.8 million? (b) How many of the zeroes would you need to issue? Requirement 2: (a) In 23 years, what will your company's repayment be if you issue the coupon bonds? (b) What if you issue the zeroes? Requirement 3: Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm's aftertax cash outflows for the first year under the two different scenarios.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Suppose your company needs to raise $35.8 million and you want to issue 23-
year bonds for this purpose. Assume the required return on your bond issue
will be 8.3 percent, and you?re evaluating two issue alternatives: a 8.3 percent
semiannual coupon bond and a zero coupon bond. Your company's tax rate is
35 percent.
Requirement 1:
(a) How many of the coupon bonds would you need to issue to raise the $35.8
million?
(b) How many of the zeroes would you need to issue?
Requirement 2:
(a) In 23 years, what will your company's repayment be if you issue the
coupon bonds?
(b) What if you issue the zeroes?
Requirement 3:
Assume that the IRS amortization rules apply for the zero coupon bonds.
Calculate the firm's aftertax cash outflows for the first year under the two
different scenarios.
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