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.

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 $46.3 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).)

Explanation / Answer

a) Price of a zero coupon bond = F / (1+r)t

F = Face Value = $1,000 (When not given specifically, assumed to be $1,000)
r = Yield to Maturity = 8.4%
t = time to maturity = 25 Years

$1,000/(1+0.084)25 = $133.13

b) Market Value of Debt = 148,000 x $1,000 x ($133.13/100) = $13,579,260

C) Total Capital of the company = $46,300,000 + $13,579,260 = $59,879,260

Weight of debt = $13,579,260/$59,879,260 = 0.226777 or 22.6777%

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