Bennington Industrial Machines issued 147,000 zero coupon bonds four years ago.

Question

Bennington Industrial Machines issued 147,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a yield to maturity of 7.2 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.3 percent.

What is the price of the bonds? What is the market value of the company's debt?

If the company has a $46.2 million market value of equity, what weight should it use for debt when calculating the cost of capital? ( all answers in two decimal place)

What is the price of the bonds? What is the market value of the company's debt?

If the company has a $46.2 million market value of equity, what weight should it use for debt when calculating the cost of capital? ( all answers in two decimal place)

Explanation / Answer

a) The price of the bond = 1000/1.083^26 = $125.79 (assuming maturity value of the bond is $1000)

b) Market value of the company's debt = $125.79*147,000 = $18,491,130

c) Weight for debt = 18,491,130/(46,200,000+18,491,130) = 28.58%

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