Answered

Westonci.ca offers quick and accurate answers to your questions. Join our community and get the insights you need today. Get expert answers to your questions quickly and accurately from our dedicated community of professionals. Experience the ease of finding precise answers to your questions from a knowledgeable community of experts.

Ace Industrial Machines issued 165,000 zero coupon bonds 6 years ago. The bonds originally had 30 years to maturity with a yield to maturity of 6.4 percent. Interest rates have recently decreased, and the bonds now have a yield to maturity of 5.5 percent. The bonds have a par value of $2,000. If the company has a $84.2 million market value of equity, what weight should it use for debt when calculating the cost of capital

Sagot :

abiolataiwo2015

Answer:

0.5202

Explanation:

Calculation to determine what weight should it use for debt when calculating the cost of capital

First step is to compute the Present value (PV) using financial calcualtor -

Put in calculator-

FV 2000

PMT 0

I 5.50%

N 24( 30 years- 6 years)

Compute PV ($553.31)

Second step is to calculate the Total value of debt

Price of bond = $553.31

*Number of bond = $165,000

=Total value of debt $91,296,150

($553.31*165,000)

Now let calculate the Weight of debt

Weight of debt =$91,296,150/($91,296,150+$84,200,000)

Weight of debt=$91,296,150/175,496,150

Weight of debt=0.5202

Therefore weight should it use for debt when calculating the cost of capital is 0.5202

Thanks for using our platform. We aim to provide accurate and up-to-date answers to all your queries. Come back soon. Thank you for visiting. Our goal is to provide the most accurate answers for all your informational needs. Come back soon. We're glad you visited Westonci.ca. Return anytime for updated answers from our knowledgeable team.