Question

Suppose your company needs to raise $19 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 10 percent, and you're evaluating two issue alternatives: a 10 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 31 percent.

Answer 1

normal bonds: $19,000,000 = 19,000 bonds

zero coupon bond: $24,366,207.91 dollars = 24,367 bonds

Step-by-step explanation:

For the zero coupon bond, we will need to calculate the value which discounted at 10% per year during 25 years equals 19,000,000:

`Principal \: (1+ r)^(time) = Amount`

Principal 19,000,000.00

time 25.00

rate 0.01000

`19000000 \: (1+ 0.01)^(25) = Amount`

Amount 24,366,207.91

For the normal bonds, the company will issue the bonds at par the bond rate matches the market rate. It will issue for a face value of 19,000,000