Bennington Industrial Machines issued 151,000 zero coupon bonds four years ago.

Question

Bennington Industrial Machines issued 151,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.1 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.2 percent.

What is the price of the bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

What is the market value of the company's debt? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

If the company has a $46.6 million market value of equity, what weight should it use for debt when calculating the cost of capital? (Do not round intermediate calculations. Round your answer to 4 decimal places (e.g., 32.1616).)

Bennington Industrial Machines issued 151,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.1 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.2 percent.

Explanation / Answer

(1) Price of zero-coupon bond = F / (1 + YTM)T where

F: face value of the bond = $1,000

YTM: Yield to maturity = 8.2%

T: Time (years) until maturity = (30 - 4) = 26

So, Price of bond = $1,000 / (1.082)6 = $128.85

(2) Market value of debt = Price of bond x Number of bonds

= $128.85 x 151,000 = $19,456,350.00

(3) Weight of debt capital = Market value of debt / (Market value of debt + Market value of equity)

= $19,456,350 / $(19,456,350 + 46,600,000) = 0.294542

= 29.4542%

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