Question

In: Finance

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different...

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different 20-year bonds to raise these funds: a coupon bond with an annual coupon rate of 8 percent; and a zero coupon bond. Your company’s tax rate is 40 percent. Both bonds will have a par value of $1,000 and a required annual return of 8 percent with semi-annual compounding.

a-1.	How many of the coupon bonds would you need to issue to raise the $44 million?

Number of coupon bonds

a-2.	How many of the zeroes would you need to issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Number of zero coupon bonds

b-1.

In 20 years, what will your company’s repayment be if you issue the coupon bonds? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Coupon bonds repayment

$

b2.

What is the repayment if you issue the zeroes? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Zeroes repayment

$

c.

Calculate your company's total after-tax cash flow during the first year for each type of bond (don't include the initial amount raised). Don't forget to adjust the cash flow for taxes. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)


Coupon bonds	(Click to select)Outflow /Inflow	$
Zero coupon bonds	(Click to select)Outflow/ Inflow	$

Expert Solution


a-1	Face Value of Bond	$1,000
	Semiannual coupon payment	$40	(1000*0.08)/2
	Number of semiannual period	40	(20*2)
	Required semiannual interest	4%
	Price of bond at the time of issue	$1,000
	Number of coupon bonds to be issued	44,000	(44000000/1000)

a-2	Zero Coupon Bond:
	Price of bond at the time of issue=
	Present Value of $1000 today =	$ 208.29	1000/(1.04^40)
	Number of Zero Coupon Bonds to be issued	211,245	(44000000/208.29)

b-1	Repayment for coupon bonds in 20 years	$44,000,000
	Coupon bond repayment	$44,000,000

b2	Repayment if zero coupon bonds are issued:
	Number of bond	211,245
	Repayment per Bond	$1,000
	Zero Bond repayment	211244907.63	(1000*211245)

c	After tax Cash flow during first year
	Coupon bonds interest payment	$ 3,520,000	($40244000)
	Total After tax cash flow=	$ 2,112,000	(3520000*(1-0.4)

	Cash flow for zero coupon bond	$0

jeff jeffy answered 2 years ago

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