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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?

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%

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jeff jeffy answered 1 year ago

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