Karen Austin Inc. has issued three types of debt on January 1, 2020, the start of the company's fiscal year. (a) $10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%. (b) $25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year. (c) $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.

Question

Judah Crawford

Business

25 February, 22:24

Karen Austin Inc. has issued three types of debt on January 1, 2020, the start of the company's fiscal year. (a) $10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%. (b) $25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year. (c) $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.

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Alexia Dalton · Answer 1

Yield rate on unsecured bonds=12%

Yield rate on zero coupon bond=12%

Yield rate on 10% mortgage bonds=12%

Total debt value=10m+25m+20m=55m

Weight of unsecured bonds=10/55=0.182

Weight of zero coupon bonds=25/55=0.455

Weight of 10% mortgage bonds = 20/55 = 0.363

Cost of debt=0.182*12 + 0.455*12+0.363*12=12%