Question

In: Finance

Liu Industrial Machines issued 151,000 zero coupon bonds four years ago. The bonds originally had 30...

Liu 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.

What is the price of the bonds? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Bond price $

What is the market value of the company's debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.) Market value $

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 and round your answer to 4 decimal places, e.g., 32.1616.) Weight of debt?

Solutions

Expert Solution

- No of Zero Coupon Bonds issued 4 years ago = 151,000

Orginally issued for 30 years, 4 years ago.

No of years left to maturity = 30 years - 4 years

= 26 years

YTM now = 8.2%

Calculating the price of Zero Coupon Bonds:-

where, Par Value of Zero Coupon Bond = $1,000

YTM = 8.2%

n = 26 years

Price = $128.85

So, Price of bond = $128.85

- Market Value of Company's Debt = Price of Bond*No of Zero Coupon Bonds

=$128.85*151,000

= $19,456,350

- Market value of equity = $46.6 million

Total market Value of Capital Structure = Market value of equity + Market Value of Company's Debt

= $19,456,350 + $46,600,000

= $66,056,350

Weight of Debt to be used in Cost of capital = Market Value of Company's Debt/Total market Value of Capital Structure

=$19,456,350/$$66,056,350

= 29.4542%

If you need any clarification, you can ask in comments.

If you like my answer, then please up-vote as it will be motivating

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Liu Industrial Machines issued 142,000 zero coupon bonds seven years ago. The bonds originally had 30...

Liu Industrial Machines issued 142,000 zero coupon bonds seven 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Bond price $ What is the market value of the company's debt? (Do not...

Problem 12-19 Calculating Capital Structure Weights [LO 3] Liu Industrial Machines issued 147,000 zero coupon bonds...

Problem 12-19 Calculating Capital Structure Weights [LO 3] Liu 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. 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? (Do not round intermediate...

(Bond valuation) Five years ago XYZ International issued some 30-year zero-coupon bonds that were priced with...

(Bond valuation) Five years ago XYZ International issued some 30-year zero-coupon bonds that were priced with a market's required yield to maturity of 8 percent and a par value of $1 comma 000. What did these bonds sell for when they were issued? Now that 5 years have passed and the market's required yield to maturity on these bonds has climbed to 10 percent, what are they selling for? If the market's required yield to maturity had fallen to 6...

Smith Corporation issued convertible bonds 5 years ago with an original maturity of 30 years, coupon...

Smith Corporation issued convertible bonds 5 years ago with an original maturity of 30 years, coupon of 4.5%, and annual payment. They were sold at their par value of $1,000 and with a conversion price of $28.57. Common stock at the time was selling for $14 per share. During the last 5 years, the stock price has not exceeded $22 per share. Straight nonconvertible debentures issued at approximately the same time had a coupon rate of 7.2%. During the next...

Five years ago, Oleander, Inc. issued $10,000,000 worth of 15-year zero coupon bonds. The bonds carry...

Five years ago, Oleander, Inc. issued $10,000,000 worth of 15-year zero coupon bonds. The bonds carry a $5,000 par value. If the market prices the bonds to yield 5.5%, what is the current value of an Oleander bond? What was the value of the bond three years ago, assuming the required rate of return was the same as today? Please explain how to work this on a financial calculator.

Newco issued 30-year bonds 12 years ago at a coupon rate of 7.5% payable quarterly. If...

Newco issued 30-year bonds 12 years ago at a coupon rate of 7.5% payable quarterly. If the bonds currently sell for 110% of par value, what is their YTM? (Full percent, Use two decimals i.e 8.00) Blank 1%

Five years ago XYZ International issued some 26-year zero-coupon bonds that were priced with a market's...

Five years ago XYZ International issued some 26-year zero-coupon bonds that were priced with a market's required yield to maturity of 8 percent and a par value of $1,000.What did these bonds sell for when they were issued? Now that 5 years have passed and the market's required yield to maturity on these bonds has climbed to 10 percent, what are they selling for? If the market's required yield to maturity had fallen to 6 percent, what would they have...

Five years ago Tosev Inc. issued 30-year, $1,000 par value, semi-annual coupon bonds with a coupon...

Five years ago Tosev Inc. issued 30-year, $1,000 par value, semi-annual coupon bonds with a coupon rate of 9.10 percent. The bonds originally sold at a price of $1,010.32 per bond. Currently, those bonds have a market price of $1,118.15 per bond. The Chief Financial Officer of Tosev is currently considering issuing new bonds. These bonds will have a par value of $1,000, semi-annual coupon payments, a term of 25 years and a coupon rate of 8 percent. Due to...

Ten years ago, a firm issued $1,000 par value, 30-year bonds with an 6.5% coupon rate...

Ten years ago, a firm issued $1,000 par value, 30-year bonds with an 6.5% coupon rate and a 7% call premium. These bonds currently trade for $1,325 and are callable beginning 20 years from date of issuance. Assume semi-annual compounding. a. Calculate the yield-to-maturity of these bonds today? b. Calculate the yield-to-call on these bonds today? Please show work!

Question 1: Six years ago the Templeton Company issued 30-year bonds with a 15% annual coupon...

Question 1: Six years ago the Templeton Company issued 30-year bonds with a 15% annual coupon rate at their $1,000 par value. The bonds had a 9% call premium, with 5 years of call protection. Today Templeton called the bonds. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. Why should or should not the investor be happy...

Subjects