Question

Ace Industrial Machines issued 125,000 zero coupon bonds 9 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 $77.8 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

Maturity of zero coupon bond =30-9 =21
New YTM =5.1%
Market Value of Debt =Number of Coupons*Par Value/(1+YTM)^n =125000*2000/(1+5.1%)^21 =87959544.5781
Weight of Debt =Market Value of Debt/(Market Value of Debt+Market Value of Equity) =87959544.5781/(77800000+87959544.5781)=0.5306