Bennington Industrial Machines issued 153,000 zero coupon bonds six years ago. T

Question

Bennington Industrial Machines issued 153,000 zero coupon bonds six 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 $46.8 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 153,000 zero coupon bonds six 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

We have:

FV = 1,000

N =30-6 = 24

R= 7.30%

We have following formula for price of the bond:

PV = FV / (1+r)^n

      = 1,000 / (1+0.0840)^24

      = 144.31

Market value of debt = 144.31 x 153,000

                                          = 22,079,470.69

Weight of debt = market value of debt / total assets

                                = 22,079,470.69 / (22,079,470.69+ 46,800,000)

                             = 0.3206

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

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