Calculate the firms aftertax cash outflows

Reference no: EM133715893

Question: Suppose your company needs to raise $50 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 7% and you're evaluating two issue alternatives: a semiannual coupon bond with a 7% coupon rate and a zero coupon bond. Your company's tax rate is 21%. Both bonds would have a par value of $1,000.

a. How many of the coupon bonds would you need to issue to raise the $50.0 million? How many zeroes would you need to issue (round to the nearest 1000)?

b. In 30 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zereos?

c. Based on your answers in (a) and (b), why would you ever want to issue the zeroes? To answer calculate the firm's aftertax cash outflows for the first year under the two different scenarios. Assume the IRS amortization rules apply for the zero coupon bonds.

Reference no: EM133715893

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