Question

A company has 2 million shares outstanding that are currently priced at $4 each and have a beta of 1.3. Five years ago the company issued bonds with a total face value of $3 million. One bond has a face value of $250,000. The bonds have a coupon rate of 3% p.a. and coupons are paid every six months. The bonds mature in fifteen years from today. The bonds currently yield 4% p.a., the market return is 7% p.a., the risk-free return is 2% p.a., and the company tax rate is 30%.

What proportion of the firm's capital structure is equity?

Answer #1

Market value of equity = number of shares × price

= 2,000,000 × 4

= $8,000,000

Total debt= $3,000,000

Face value = $250,000

Number of bonds = total debt / face value

= 3,000,000 / 250,000

= 12

Current yield = Annual coupon / current market price

Current market price= Annual coupon / Current yield

= 250,000 × 3% / 0.04

= 7,500 / 0.04

= $187,500

Total market value of debt= 187,500 × 12

= $2,250,000

Total market value of firm = market value of equity + market value of debt

= 8,000,000 + 2,250,000

= $10,250,000

Proportion of equity= Market value of equity / Total market value of firm

= 8,000,000 / 10,250,000

= 0.7805 or **78.05%**

A company has 2 million shares outstanding that are currently
priced at $4 each and have a beta of 1.3. Five years ago the
company issued bonds with a total face value of $3 million. One
bond has a face value of $250,000. The bonds have a coupon rate of
3% p.a. and coupons are paid every six months. The bonds mature in
fifteen years from today. The bonds currently yield 4% p.a., the
market return is 7% p.a., the...

A company has 2 million shares outstanding that are currently
priced at $4 each and have a beta of 1.3. Five years ago the
company issued bonds with a total face value of $3 million. One
bond has a face value of $250,000. The bonds have a coupon rate of
3% p.a. and coupons are paid every six months. The bonds mature in
fifteen years from today. The bonds currently yield 4% p.a., the
market return is 7% p.a., the...

A company has 3 million shares outstanding that are currently
priced at $4 each and have a beta of 1.3. Seven years ago the
company issued bonds with a total face value of $3 million. One
bond has a face value of $500,000. The bonds have a coupon rate of
3% p.a. and coupons are paid every six months. The bonds mature in
eight years from today. The bonds currently yield 2% p.a., the
return on the stock market is...

A company has 3 million shares outstanding that are currently
priced at $4 each and have a beta of 1.3. Seven years ago the
company issued bonds with a total face value of $3 million. One
bond has a face value of $500,000. The bonds have a coupon rate of
3% p.a. and coupons are paid every six months. The bonds mature in
eight years from today. The bonds currently yield 2% p.a., the
return on the stock market is...

A company has 3 million shares outstanding at a market price of
$1.50 each. The company's bonds have a total market value of
$2,700,000, have a coupon rate of 3% p.a. and currently yield 4%
p.a. The current market value of preference shares is $500,000 and
currently return 5% p.a. The company has a beta of 0.7, the market
risk premium is 6% p.a., the risk-free return is 2% p.a., and the
company tax rate is 30%,
What is the...

A company has 3 million shares outstanding at a market price of
$1.50 each. The company's bonds have a total market value of
$2,700,000, have a coupon rate of 3% p.a. and currently yield 4%
p.a. The current market value of preference shares is $500,000 and
currently return 5% p.a. The company has a beta of 0.7, the market
risk premium is 6% p.a., the risk-free return is 2% p.a., and the
company tax rate is 30%,
What is the...

A company has 3 million shares outstanding at a market price of
$1.50 each. The company's bonds have a total market value of
$2,700,000, have a coupon rate of 3% p.a. and currently yield 4%
p.a. The current market value of preference shares is $500,000 and
currently return 5% p.a. The company has a beta of 0.7, the market
risk premium is 6% p.a., the risk-free return is 2% p.a., and the
company tax rate is 30%,
What is the...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 8 minutes ago

asked 10 minutes ago

asked 29 minutes ago

asked 35 minutes ago

asked 38 minutes ago

asked 58 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago