Question

Hankins Corporation has 8.8 million shares of common stock outstanding, 630,000 shares of 7.3 percent preferred stock outstanding, and 188,000 of 8.5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $65.30 per share and has a beta of 1.33, the preferred stock currently sells for $106.70 per share, and the bonds have 14 years to maturity and sell for 89.5 percent of par. The market risk premium is 6.95 percent, T-bills are yielding 5.65 percent, and the firm’s tax rate is 40 percent.

a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)
  

Market value weight of debt
Market value weight of preferred stock
Market value weight of equity

Answer 1

Market value of debt = 188,000 * ( 89.5% of 1000)

Market value of debt = 188,000 * 895 = 168,260,000

Market value of preferred stock = 630,000 * 106.70 = 67,221,000

Market value of equity = 8,800,000 * 65.3 = 574,640,000

Total market value = 168,260,000 + 67,221,000 + 574,640,000 = 810,121,000

Market value weight of debt = 168,260,000 / 810,121,000 = 0.2077

Market value weight of preferred stock = 67,221,000 / 810,121,000 = 0.0829

Market value weight of equity = 574,640,000 / 810,121,000 = 0.7093