Suppose your company needs to raise $40.7 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're evaluating two issue alternatives: a semiannual coupon bond with a coupon rate of 5.7 percent and a zero coupon bond. The tax rate is 22 percent. Both bonds will have a par value of $1,000. a. How many of the coupon bonds would you need to issue to raise the $40.7 million? How many of the zeroes would you need to issue? Note: 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 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? Note: 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 firm's aftertax cash outflows for the first year under the two different scenarios. Note: 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. a. Number of coupon bonds Number of zero coupon bonds b. Coupon bond repayment Zero coupon bond repayment c. Coupon bond cash flow Zero coupon bond cash flow
Suppose your company needs to raise $40.7 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're evaluating two issue alternatives: a semiannual coupon bond with a coupon rate of 5.7 percent and a zero coupon bond. The tax rate is 22 percent. Both bonds will have a par value of $1,000. a. How many of the coupon bonds would you need to issue to raise the $40.7 million? How many of the zeroes would you need to issue? Note: 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 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? Note: 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 firm's aftertax cash outflows for the first year under the two different scenarios. Note: 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. a. Number of coupon bonds Number of zero coupon bonds b. Coupon bond repayment Zero coupon bond repayment c. Coupon bond cash flow Zero coupon bond cash flow
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Suppose your company needs to raise $40.7 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're evaluating two issue alternatives: a semiannual coupon bond with a coupon rate of
5.7 percent and a zero coupon bond. The tax rate is 22 percent. Both bonds will have a par value of $1,000.
a. How many of the coupon bonds would you need to issue to raise the $40.7 million? How many of the zeroes would you need to
issue?
Note: 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 20 years, what will your company's repayment
if you issue the coupon bonds? What if you issue the zeroes?
Note: 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 firm's aftertax cash outflows for the first year
under the two different scenarios.
Note: 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.
a. Number of coupon bonds
Number of zero coupon bonds
b. Coupon bond repayment
Zero coupon bond repayment
c. Coupon bond cash flow
Zero coupon bond cash flow
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