Bennington Industrial Machines issued 149,000 zero coupon bonds six years ago. T

Question

Bennington Industrial Machines issued 149,000 zero coupon bonds six 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.

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 $46.4 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 149,000 zero coupon bonds six 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.

Explanation / Answer

Bonds market value:

= $135.63*149,000

= $20,208,870

Weight of debt:

= $20,208,870/($46,400,000+$20,208,870)

= 30.34% or 0.3034

Face value (FV) $                                         1,000 Coupon rate 0.00% Number of compounding periods per year 2 Interest per period (PMT) $                                                -   Number of years to maturity 24 Number of compounding periods till maturity (NPER) 48 Market rate of return/Required rate of return 8.50% Market rate of return/Required rate of return per period (RATE) 4.25% Bond price PV(RATE,NPER,PMT,FV)*-1 Bond price $                                       135.63

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