Bennington Industrial Machines issued 148,000 zero coupon bonds five years ago.

Question

Bennington Industrial Machines issued 148,000 zero coupon bonds five years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.3 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.4 percent.

If the company has a $46.3 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 148,000 zero coupon bonds five years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.3 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.4 percent.

Explanation / Answer

Face value (FV) $                                   1,000.00 Coupon rate 0.000% Number of compounding periods per year 1 Interest per period (PMT) $                                                -   Number of years to maturity 25 Number of compounding periods till maturity (NPER) 25 Market rate of return/Required rate of return 8.40% Market rate of return/Required rate of return per period (RATE) 8.40% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $                                       133.13 Market value Weights Common stock $                 46,300,000 0.7015 Debt $                 19,703,240 0.2985 148000*133.13 Total $                 66,003,240 1.0000

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