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Here I Sit Sofas has 8,000 shares of common stock outstanding at a price of $103...

Here I Sit Sofas has 8,000 shares of common stock outstanding at a price of $103 per share. There are 960 bonds that mature in 39 years with a coupon rate of 7.7 percent paid semiannually. The bonds have a par value of $2,000 each and sell at 113 percent of par. The company also has 6,900 shares of preferred stock outstanding at a price of $56 per share. What is the capital structure weight of the debt?

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Answer #1

Debt:

Number of bonds outstanding = 960
Face Value = $2,000

Current Price = 113% * $2,000
Current Price = $2,260

Market Value of Debt = 960 * $2,260
Market Value of Debt = $2,169,600

Preferred Stock:

Number of shares outstanding = 6,900
Current Price = $56

Market Value of Preferred Stock = 6,900 * $56
Market Value of Preferred Stock = $386,400

Common Stock:

Number of shares outstanding = 8,000
Current Price = $103

Market Value of Common Stock = 8,000 * $103
Market Value of Common Stock = $824,000

Market Value of Firm = Market Value of Debt + Market Value of Preferred Stock + Market Value of Common Stock
Market Value of Firm = $2,169,600 + $386,400 + $824,000
Market Value of Firm = $3,380,000

Weight of Debt = $2,169,600 / $3,380,000
Weight of Debt = 0.6419

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