Question

Ace Industrial Machines issued 115,000 zero coupon bonds 7 years ago. The bonds originally had 30 years to maturity with a yield to maturity of 6 percent. Interest rates have recently decreased, and the bonds now have a yield to maturity of 5.1 percent. The bonds have a par value of $2,000. If the company has a $76.2 million market value of equity, what weight should it use for debt when calculating the cost of capital?

Answer 1

C6 fax --PV(C1,C2,C3,C4,C5) Α 1 RATE(i) Rate Per Period 2 NPER(n) Total No.of periods 3 PMT Payment per period Future value 5 TYPE Ending(0), Beginning(1) 6 PV Present Value (-PV(rate,nper,pmt,fv,type)) 0.0255 0.051/2 46 23*2 0 2000 $ 628.04 (-PV(0.0255,46,0,2000,0)) Market Value of Debt 115000*628.04 7,22,24,600 Market value of equity shares = 76.2*1000000 7,62,00,000 Weight of Debt Debt/Debt+Equity) 72224600/(72224600+76200000) 0.486608015 48.66%