Question

Saint Nick Enterprises has 18,100 shares of common stock outstanding at a price of $72 per share. The company has two bond issues outstanding. The first issue has 10 years to maturity, a par value of $2,000 per bond, and sells for 103 percent of par. The second issue matures in 24 years, has a par value of $1,000 per bond, and sells for 108 percent of par. The total face value of the first issue is $280,000, while the total face value of the second issue is $380,000. What is the capital structure weight of debt?

Answer 1

The weight of debt is computed as shown below:

= Total value of debt / (Total value of debt + Total value of equity)

Value of First issue of bond is computed as follows:

= 103% x $ 280,000

= $ 288,400

Value of second issue of bond is computed as follows:

= 108% x $ 380,000

= $ 410,400

Total market value of debt will be as follows:

= $ 288,400 + $ 410,400

= $ 698,800

Total value of common stock is computed as follows:

= 18,100 x $ 72

= $ 1,303,200

So, the weight of debt is computed as follows:

= $ 698,800 / ($ 698,800 + $ 1,303,200)

= 34.91% Approximately

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