Liu Industrial Machines issued 141,000 zero coupon bonds six years ago. The bond

Question

Liu Industrial Machines issued 141,000 zero coupon bonds six years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.1 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.2 ercent if the company has a 545 6 million market value of equity, what weight should it use tor debt when calculating the cost of capital? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) eight of debt

Explanation / Answer

Face Value of Zero-coupon bond = $1,000
Time to maturity = 24 years
Yield to maturity = 8.20%

Current Price of Bond = $1,000 / 1.082^24
Current Price of Bond = $150.85

Number of bonds issued = 141,000

Value of Bonds = 141,000 * $150.85
Value of Bonds = $21,269,850

Value of Equity = $45,600,000

Total Value of Firm = Value of Bonds + Value of Equity
Total Value of Firm = $21,269,850 + $45,600,000
Total Value of Firm = $66,869,850

Weight of Debt = Value of Bonds / Total Value of Firm
Weight of Debt = $21,269,850 / $66,869,850
Weight of Debt = 0.3181

So, weight of debt used for calculating cost of capital is 0.3181

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