Finance Homework Question?

Question

Finance Homework Question?
You need to raise $4.5 million for company expansion and you expect that 5-year zero coupon bonds can be sold at a price of $567.44 for each $1,000 bond.

Q1) How many $1,000 par value zero coupon bonds would your company have to sell to raise the needed $4.5 million?

Q2) What will be the burden of this bond issue on the future cash flows generated by your company? What will be the annual debt service cost?

Answer 1

Q1) 7,931. $4,500,000/$567.44 = 7930.4 (round up). Assumes no transaction fees.

Q2) The zero-coupon bond accrued interest at 12% per annum (567.44/1000^(1/5)-1). The annual debt service can be accrued at $86.512 per year [(1000-567.44)/5) per bond. Just multiply by 7931 to get the total burden per year ($686,126.67). Since it is zero coupon, there are no cash flows until year five, when the cash flows will be negative $4.5m

Answer 2

As you say it is a " HOMEWORK " question therefore you and you alone should be answering it not random people on the internet , you will never get your grades whilst others are doing the work -answers for you .