A company needs to raise $22 million and plans to issue 20-year bonds for this purpose.The required rate of return is7.6 percent in the current market.The company has two issue alternatives: a 7.6 percent coupon and a zero coupon bond.The company's tax rate is 34 percent.At bond maturity, how much will the company need to pay to its bondholders if it issues the coupon bonds? What if it issue the zeros? Assume semiannual compounding for both bond issues.(For simplicity's sake, assume the company can issue a partial bond.)

Question

Quizplus · Accepted Answer

For coupon bonds, the company will pay the face value of $22 million at maturity. For zero-coupon bonds, the future value is calculated using the formula for compound interest, resulting in $97.795 million.

A Company Needs to Raise $22 Million and Plans to Issue