Bennington Industrial Machines issued 138,000 zero coupon bonds seven years ago.

Question

Bennington Industrial Machines issued 138,000 zero coupon bonds seven years ago. The bonds originally had 30 years to maturity with a yield to maturity of 6.8 percent. Interest rates have recently increased, and the bonds now have a yield to maturity of 8.4 percent.

If the company has a $45.3 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).)

If the company has a $45.3 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

Assumption

Face Value= 1000

So total face value= 138000*1000= $138000000

Market Value of debt= Face value/(1+YTM)^years till maturity

=138000000/(1+8.4%)^23

=21587661.31

=21.59 Million

Weight of debt= 21.59/(21.59+45.3)

Weight of debt=32.28%

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