KRJ International’s 2018 balance sheet shows long-term debt with a book value of $1,000,000 and the company’s bonds are currently trading at 110% of their par value with a yield to maturity of 7

Finance Dec 03, 2020

KRJ International’s 2018 balance sheet shows long-term debt with a book value of $1,000,000 and the company’s bonds are currently trading at 110% of their par value with a yield to maturity of 7.5%. The company’s footnotes also reported that that firm was a heavy user of operating leases with future lease obligations averaging $400,000 per year over the next 8 years. What should be the total amount of debt used to determine the weight of debt in the WACC calculation? Please show all work and calulations in excel.

Expert Solution

Market value of long term debt = 1000000*110% =$ 1,100,000Add: PV of operating leases = 400000*(1.075^8-1)/(0.075*1.075^8) =$ 2,342,921Total amount of debt to be used for WACC calculation =$ 3,442,921

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