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What conditions would a zero coupon bond

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Reference no: EM132600761

Suppose your company needs to raise $20 million and you want to issue 25 year bonds for this purpose. Assume the required return on your bond issue will be 5 percent and you're evaluating two issue alternatives: a 5 percent annual coupon bond and a zero coupon bond. Your company's tax rate is 40 percent.

Required:

Question (1) Compare the two alternatives, considering:

a) the number of bonds that would need to be issued

b) repayment obligation

c) aftertax annual cash flows for the first year

Question (2) Under what conditions would you choose a zero coupon bond over an annual coupon bond?

Reference no: EM132600761

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