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Suppose your company needs to raise $45 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re evaluating two issue alternatives: A 6 percent semi-annual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent.
Calculate the after tax cash flows for the first year for each bond
Coupon Bond:
Zero Coupon Bond:
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In the given question the company is required to raise $ 45 million for which 2 alternatives are there. 1 Issuance of Zero-coupon bond and 2. issuance of coupon bond with 6% interest payable semi-annually. out of the two the alternative to issue zero-coupon bond is better being zero interest cost
The assignment just asked for First year after tax cash flows. The Solution provides for same. For coupon bond the semi-annual interest will be the cost @ 3% and for zero coupon bond, there is no requirement for payment of interest being zero interest bonds, hence, the first year cash flows are zero.
can you use formulas to calculate the two alternatives and even if you are using excel which of the formulas were use PV, FV, RATE or what. For example, there is no calculations on the semi-annaul coupon bond with a 6% coupon rate, you just arranged the figures given from the question and also the zero couponn bond doesn't show any work, all I see are some numbers posted. Can I get a detail calculation of the two alternatives being asked? Below is the quetsion again. Thanks The client needs to raise $45 million for his company and wants to issue 30-year bonds for this purpose. The required rate of return for the bond is 6 percent. Students are evaluating two issue alternatives: (1) a semi-annual coupon bond with a 6 percent coupon rate, and (2) a zero coupon bond. The company’s tax rate is 35 percent.
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