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 7% p.a., the risk-free return is 1% p.a., and the company tax rate is 30%.
What proportion of the firm's capital structure is debt?
Capital structure = market value of debt + market value of equity
Market value of equity = Shares outstanding* price per share
= 3million * $4 = $12m
Market value of debt = $2,668,847.84
It is been computed usinf Financial calculator, here are the steps:
N=16 (coupons are paid semiannually and 8 years left for maturity. so 8*2 = 16)I
I/Y = 1% (2% p.a, samiannually will be 1%)
PMT = 7500 (3% of face value = 15,000, semiannualy will be 7,500)
FV =3,000,000
PV = $2,668,847.84
Capital structure = $2,668,847.84 + 12,000,000
Capital structure = 14,668,847.84
Proportion of debt = $2,668,847.84/14,668,847.84
= 0.18193 or 18.193%
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