Bennington Industrial Machines issued 138,000 zero coupon bonds seven years ago.
ID: 2719791 • Letter: B
Question
Bennington Industrial Machines issued 138,000 zero coupon bonds seven years ago. The bonds originally had 30 years to maturity with a yield to maturity of 6.8 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.4 percent.
What is the price of the bonds?
What is the market value of the company's debt?
If the company has a $45.3 million market value of equity, what weight should it use for debt when calculating the cost of capital?
Bennington Industrial Machines issued 138,000 zero coupon bonds seven years ago. The bonds originally had 30 years to maturity with a yield to maturity of 6.8 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.4 percent.
What is the price of the bonds?
What is the market value of the company's debt?
If the company has a $45.3 million market value of equity, what weight should it use for debt when calculating the cost of capital?
Explanation / Answer
(b) Market Value of the Firm=2158766.131
(c) Debt Ratio=Debt/Equity+Debt
=2.158/45.3+2.158
=2.158/47.458
=.0456%
Year Amount Pv Factor @8.4% Present Value 0 0 1 0 1 0 0.923 0 2 0 0.851 0 3 0 0.785 0 4 0 0.724 0 5 0 0.668 0 6 0 0.616 0 7 0 0.569 0 8 0 0.525 0 9 0 0.484 0 10 0 0.446 0 11 0 0.412 0 12 0 0.380 0 13 0 0.350 0 14 0 0.323 0 15 0 0.298 0 16 0 0.275 0 17 0 0.254 0 18 0 0.234 0 19 0 0.216 0 20 0 0.199 0 21 0 0.184 0 22 0 0.170 0 23 13800000 0.156 2158766.131 TOTAL 2158766.131 ASSUME BOND VALUE=100 Value of bond 15.64323283Related Questions
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