Question

Ace Industrial Machines issued 160,000 zero coupon bonds 5 years ago. The bonds originally had 30 years to maturity with a yield to maturity of 6.3 percent. Interest rates have recently decreased, and the bonds now have a yield to maturity of 5.4 percent. The bonds have a par value of $2,000. If the company has a $83.4 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., .1616.)

Weight of debt? _____

Answer 1

Par/Face value	2000
Annual Coupon rate	0
Annual coupon	0
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is .054 and t is the time period in years.
price of the bond = sum of present values of future cash flows
r	0.054
t	1	2	3	25
future cash flow	0	0	0	2000
present value	0	0	0	537.05
sum of present values	537.05
The price of the bonds is $537.05.
Total number of bonds	160000
Price of each bond	537.05
Total number of bonds*Price	537.05*160000
Total number of bonds*Price	85928000
Total value of bonds/Debt	85928000
Market value of equity/Equity	83400000
Debt + Equity	85928000+83400000
Debt + Equity	169328000
Weight of debt	Debt/(Debt+Equity)
Weight of debt	85928000/(169328000)
Weight of debt	0.5075
The weight of debt is .5075.