Bennington Industrial Machines issued 152,000 zero coupon bonds five years ago.

Question

Bennington Industrial Machines issued 152,000 zero coupon bonds five years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.2 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.3 percent.

If the company has a $46.7 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).)

If the company has a $46.7 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).)

Explanation / Answer

Current Market Value of debt = 152000*100/ ((1+0.083)^25) = 20707714.7

(Assuming face value of bond as 1000)

Weight of Debt = Market value of debt/ (Equity + Debt) = 20707714.7/(46700000+20707714.7) = 30.72%

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.