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Liu Industrial Machines issued 144,000 zero coupon bonds five years ago The bonds originally had 30 years to maturity with a yield to maturity of 7.4 percent Interest rates have recently increased and the bonds now have a yield to maturity of 8.5 percent. If the company has a $45.9 million market value of equity, what weight should it use for debt when calculating the cost of capital? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Weight of debt

Explanation / Answer

Value of bond = 1000 / (1+8.5%)^25 = 130.09

Value = 130.09 * 144000 = 18.73 Million

Total value of capital = 18.73 + 45.90 = 64.63 Million

Weight of debt = 18.73 / 64.63 * 100 = 28.98 or 29%

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