Bennington Industrial Machines issued 151,000 zero coupon bonds four years ago.

Question

Bennington Industrial Machines issued 151,000 zero coupon bonds four 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 percent. Required: 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 $46.6 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

Bennington Industrial Machines All Amounts in $ Based on the current yield to maturity of 8.2%, the market price of the bonds works out to $ 94.01 This is assuming the face value per bond to be $ 100 The market value of the Company's debt will be 151,000 X $ 94.01 = 14195510.00 $ The market value of the equity is $ 46.6 million The market value of the debt as calculated above is $ 14.2 million Total Capital base = $ 60.8 million The weight to be used for debt will be $ 14.2 / $ 60.8 = 23.36%

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