Question

1. A company’s zero coupon bond issue matures in 16 years and has a yield to maturity of 10.60%. Each zero has a face value of $1,000 and there are 4,000 of the bonds outstanding. If the market values the equity at $1,800,000, what capital structure weight for debt would you use in calculating the WACC, assuming the firm’s only debt consists of the zeros?

1. 0.106
2. 0.299
3. 0.690
4. 0.693
5. none of the above

In the solution of this problem, using a Ti-84 calculator, the inputs are as follows:

N: 16 * 2 = 32
I/Y = 10.6 / 2 = 5.3
PMT = 0
FV = 1000
PV = Solve

Where in the problem does it imply that the coupon is semiannual? I know when a problem states that the bond/stock is semiannual, quarterly, etc the N, I/Y and PMT is affected. But I do not see any key words in this problem. Am I missing a concept here?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

BA PLUS- Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut AC Wrap Text Calibri 11 General E Copy Fill Merge & Center Insert Delete Format Paste B I U +.0 .00 Conditional Format Cell Sort & Find & % Format Painter .00 0 Clear Filter Select Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells fx E211 A В D E F G H K 206 207 IN GENERAL, WHEN NOTHING IS MENTIONED 208 WE ASSUME THAT ZERO COUPON BOND IS WITH SEMI ANNUAL COMPOUNDING 209 IN US, GENERALLY ALL BONDS ARE SEMI ANNUAL 210 211 N 32 I/Y 5.3 212 PMT 0 213 FV 1000 PV 191.55 (WwE HAVE TO FIND) 214 215 216 217 NOW 218 VALUE OF BOND 4000 X 191.55 766200 1800000 219 VALUE OF EQUITY 220 2566200 221 222 ANSWER WEIGHT OF DEBT 766200/2566200 0.299 223 224 225 226 Sheet4 choice NPV BOND PV FV EAR II Rea erences 120% WA 00:45 ENG 22-11-2019