Suppose your company needs to raise $42 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a coupon rate of 7 percent and a zero coupon bond. Your company’s tax rate is 30 percent. Both bonds will have a par value of $1,000.
How many of the coupon bonds would you need to issue to raise the $42 million?
What if you issue the zeroes? Zeros repayment $?
Calculate the aftertax cash flows for the first year for each bond. Coupon bond $? Zeo coupon bond $?