Question

Question 7 1 pts

ABC, Inc., has 817 shares of common stock outstanding at a price of $50 a share. They also have 211 shares of preferred stock outstanding at a price of $80 a share. There are 690, 8 percent bonds outstanding that are priced at $40. The bonds mature in 16 years and pay interest semiannually. What is the capital structure weight of the preferred stock?

Enter your answer as a percentage rounded off to two decimal points. Do not enter % in the answer box.

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Question 8 1 pts

Several years ago, the ABC Company sold a $1,000 par value bond that now has 15 years to maturity and a 6.50% annual coupon that is paid semiannually.  The bond currently sells for $980 and the company’s tax rate is 35%.  What is the after-tax cost of debt?

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Question 9 1 pts

If the market value of debt is $107763, market value of preferred stock is $90535, and market value of common equity is 292235, what is the weight of preferred stock?

Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box.

Answer 1

Ans 7) weight of preferred stock = (no. of preferred stock * price of preferred stock)/(no of common stock * price of common stock + no. of preferred stock * price of preferred stock + no. of bond * price of bond)

= (211 * 80)/(50*817 + 211*80 + 40*690)

= 19.78%

Ans 8) we need to find yield to maturity using bond valuation formula

Bond price = C * (1 - (1+r/2)^(-2*n))/r/2 + FV/(1 + r/2)^2n

where C is coupon payment

r is interest rate

n is year to maturity

FV is face value of bond

using above formula we will fing the value of r using trail and error method

r = 6.71%

after tax cost of debt = r * (1 - tax rate)

= 6.71*(1-.35) = 4.36%

Ans 9) weight of preferred stock = market value of preferred stock /(market value of preferred stock + market value of debt + market value of common equity)

= 90535/(107763+ 90535+ 292235) = 18.46%