Question

Dick’s Construction Company has 70,000 bonds outstanding that are selling at par value of $1,000 each. The bonds yield 7 percent. The company also has 4 million shares of common stock outstanding selling currently at $20 per share. Dick’s stock has an expected return of 10%. Dick’s tax rate is 21 percent. What is Dick’s percent weight of financing with DEBT?

Answer 1

Given,

No. of bonds = 70000

Par value = $1000

Shares outstanding = 4 million or 4,000,000

Share price = $20

Solution :-

Debt value = No. of bonds x Par value

= 70000 x $1000 = $70,000,000

Equity value = Shares outstanding x share price

= 4000000 x $20 = 80,000,000

Total value = $70,000,000 + $80,000,000 = $150,000,000

Now,

Percent weight of debt = Debt value Total value

= $70,000,000 $150,000,000 = 0.4667 or 46.67%