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solution

Assume that your company financed needs to
raise
$942,222 and you want to issue
10-year bonds for this purpose. Suppose that required return on
your bond issue will be 9%, and you are
evaluating 2 issue alternatives: a
semiannual coupon bond with a coupon rate
of 9% and a zero-coupon bond, you company’s tax rate is 20%, both
bonds will have a par value of VND 100,000.

a)How many the coupon bonds would you need to issue
to raise the capital needed? (0.5)

b)How many zero-coupon bonds would you need to
issue? (0.5)

c)In the 10 years,
what will your company’s repayment be
if you issue the coupon bonds? What
if you issue the zeroes? (1)

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

Solution:

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