Question

Debt: 65,000 bonds outstanding ($1,000 face or par value) with an 7% coupon, 15 years to maturity, selling for 106 percent of par; the bonds make semiannual payments. Common Stock: 700,000 shares outstanding, selling for $65 per share; the beta is 1.2. Preferred Stock: 80,000 shares outstanding ($100 par value), it pays a 10% dividend on par, and it is selling for $125 per share. Market: The expected return on the market portfolio is 10% , the risk-free rate is 2% and the tax rate is 26%.

What is the firm’s capital structure (Wd, Wps, We)?

Answer 1

Here we are required to find the firm’s capital structure (Wd, Wps, We) as per the question

Total value of debt = no of bonds * par value * selling % of par

= 65000 * 1000* 1.06 = 68900000

Total value of common equity= no of shares outstanding * price of each share

= 700000 * 65

= 45500000

Total value of preferred equity= no of shares outstanding * price of each share

= 80000 * 125

= 10000000

Total value of firm = value of debt + common equity + preferred equity = 68900000 + 45500000 + 10000000 = 124400000

Weight of debt (Wd) = 68900000 / 124400000 = 0.5538 or 55.38%

Weight of preferred stock(Wps) = 10000000 / 124400000 = 0.0804 or 8.04%

Weight of equity(We) = 45500000 / 124400000 = 0.3657 or 36.57%