Question

Suppose your company needs to raise $18 million and you want to issue 27-year bonds for this purpose. Assume the required return on your bond issue will be 5 percent, and you're evaluating two issue alternatives: a 5 percent semiannual coupon bond and a zero-coupon bond. Your company's tax rate is 31 percent.

a. You will need to issue 18.000 of the coupon bonds to raise the $18 million. You will need to issue.........of the zeroes to raise the $18 million. (Round your answers to the nearest whole number. (e.g., 32))

b. In 27 years, your company's repayment will be $........... if you issue the coupon bonds. (Do not include the dollar sign ($).)

If you issue the zeroes, your company's repayment will be $...................... (Do not include the dollar sign ($). Do not round your intermediate calculations. Round your answers to the nearest whole number. (e.g., 32))

c. Your after-tax cash outflow for the first year will be $621.000 if you issue the coupon bonds, and a cash inflow of $ ............... if you issue the zeroes. (Do not include the dollar signs ($). Do not round your intermediate calculations. Round your answers to the nearest whole number. (e.g., 32))

>> If numbers already given, then that means that these are the correct answers already. Everywhere with "............" are numbers that are still missing and need to be solved.

Answer 1

the excel working is shown below for the question a)

the net outflow in case of interest nbonds is as followsthe net outflow in case of Zero coupen bonds are 18 millions