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Suppose your company needs to raise $47 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 6%, and you're evaluating two issue alternatives: a semiannual coupon bond with a coupon rate of 6 percent and a zero coupon bond. You company's tax rate is 35%. Both bonds will have a par value of $1000.
a. How many of the coupon bonds would you need to issue to raise the $47 million? How many of the zeros would you need to issue?
b. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeros?
c. Based on your answers in (a) and (b), why would you ever want to issue the zero's ? To answer, calculate the firm’s aftertax outflows for the first year under the two different scenarios. Assume the IRS amortization rules apply for the zero coupon bonds.
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