Suppose your company needs to raise $35 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a 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.
How many of the coupon bonds would you need to issue to raise the $35 million?
How many of the zeroes would you need to issue?
In 20 years, what will your company’s repayment be if you issue the coupon bonds?
What if you issue the zeroes?
Calculate the aftertax cash flows for the first year for each bond:
Coupon Bonds - (Inflow/Outflow) = ?
Zero Coupon Bonds - (Inflow/Outflow) = ?