Defense Electronics, Inc. (DEI), a large publicly traded firm is the market share leader in radar...

Defense Electronics, Inc. (DEI), a large publicly traded firm is the market share leader in radar detection systems (RDSs), has asked you to compute the cost of debt for the firm. The cost of debt is equivalent to the required return to debtholders, or the firm’s YTM. Using the information provided below, compute the firm’s cost of debt and the total market value of the firm’s debt.

Debt: 230,000 7.2 percent coupon bonds outstanding, 25 years to maturity, selling for 108 percent of par; the bonds have a $1,000 par value each and make semiannual coupon payments.

Solutions

Expert Solution

semiannual interest = 1000 * .072 *6/12 = 36

semiannual months = 25*2=50

issue price = 1000*108% =1080

Yield to maturity = [interest + (Face value - price)/semiannual months ]/[(face value +price)/2]

=[36+(1000-1080)/50]/[(1000+1080)/2]

=[36+ (-80/50)]/[2080/2]

=[36 - 1.6]/1040

= 34.4/1040

= .0331 or 3.31% semiannually (approx to 3.18% using financial calculator)

Annual yield to maturity = 3.31 *2 = 6.62% (3.18*2=6.36%)

cost of debt = 6.62%

2)market value of debt = market price* number of bonds

= 1080 *230000

= $ 248,400,000

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Defense Electronics, Inc. (DEI), a large publicly traded firm is the market share leader in radar...

Defense Electronics, Inc. (DEI), a large publicly traded firm is the market share leader in radar detection systems (RDSs), is considering a new project producing a new line of RDSs. The project will last 5 years and is expected to generate the following net cash flows (CFFA): Year CFFA 1 $12,450,000 2 $12,450,000 3 $12,450,000 4 $12,450,000 5 $26,575,000 a) The initial cost of this project is $38,600,000. If the appropriate discount rate for this project is 12.31%, what is...

MECAB is a large, publicly traded firm that is the market share leader in Electric Cables...

MECAB is a large, publicly traded firm that is the market share leader in Electric Cables manufacturing and distribution. The current market data on MECAB securities is as follows: Debt: 130,000 7 percent coupon bonds outstanding, 15 years to maturity, selling for 94 percent of par; with a $100 par value and making semiannual payments. Common stock: 6,000,000 shares outstanding, selling for 52 per share; the beta is 1.2. Preferred stock: 300,000 shares of preferred stock outstanding, paying a dividend...

Electric Youth, Inc. (EY) is a publicly-traded firm that is the market share leader in perfume...

Electric Youth, Inc. (EY) is a publicly-traded firm that is the market share leader in perfume for teenagers. You are charged with estimating the cost of capital for the firm. The following market data on EY’s securities are current: Debt 10,000 seven percent coupon bonds outstanding, 15 years to maturity, selling for 92 percent of par; the bonds have a $1,000 par value each and make annual payments. Common stock 250,000 shares outstanding, selling for $55 per share; the beta...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.9 million in anticipation of using it as a toxic dump site for waste chemicals, but it...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $5.1 million in anticipation of using it as a toxic dump site for waste chemicals, but it...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4 million in anticipation of using it as a toxic dump site for waste chemicals, but it...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7 million in anticipation of using it as a toxic dump site for waste chemicals, but it...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.4 million in anticipation of using it as a toxic dump site for waste chemicals, but it...

Subjects