Assume that your company requires to raise $45 million and you want to issue 30-year bonds for this purpose. Suppose that the required return on your bond issue will be 6 percent, and you are evaluating two issue alternatives: a 6 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent.
a. How many of the coupon bonds would you require to issue to increase the $45 million? How many of the zeros would you require to issue?
b. In 30 years, will your company's 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, compute the firm's aftertax cash outflows for the first year under the two different scenarios. Suppose that the IRS amortization rules apply for the zero coupon bonds.