23 Jul WHAT IF YOU ISSUE THE ZEROES?
Zero Coupon Bonds. Suppose your company needs to raise $30 million and you want to issue 20-year Show more Zero Coupon Bonds. Suppose your company needs to raise $30 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 7.5 percent and youre evaluating two issue alternatives: a 7.5 percent semiannual coupon bond and a zero coupon bond. Your companys tax rate is 35 percent. a. How many of the coupon bonds would you need to issue to raise the $30 million? How many of the zeroes would you need to issue? b. In 20 years what will your companys repayment be if you issue the coupon bonds? What if you issue the zeroes? c. Based on your answers in (a) and (b) why would you ever want to issue the zeroes? To answer calculate the firms aftertax cash outflows for the first year under the two different scenarios. Assume that the IRS amortization rules apply for the zero coupon bonds. Show less
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