Question

# Question 1 Your company’s bonds have a 10% annual yield, 8% annual coupon rate and 20...

Question 1

Your company’s bonds have a 10% annual yield, 8% annual coupon rate and 20 years to

maturity. There are 5000 bonds outstanding. The price of preferred stock is \$30 per share and

there are 100,000 shares outstanding. Retained Earnings are 10,000,000 \$.

a) Compute the price of each bond

b) Compute the total market value of debt outstanding

c) Compute the total market value of preferred stock

d) Compute the weights of each source of financing

a). To find the bond's price, we need to put the following values in the financial calculator:

 INPUT 20 10 8%*1,000=80 1,000 TVM N I/Y PV PMT FV OUTPUT -829.73

So, Bond' Price = \$829.73

b). Market Value of Debt = \$829.73 x 5,000 = \$4,148,643.63

c). Market Value of Preferred Stock = \$30 x 100,000 = \$3,000,000

d). Total Market Value of the Company = Market Value of Debt + Market Value of Preferred Stock + Retained Earnings

= \$4,148,643.63 + \$3,000,000 + \$10,000,000 = \$17,148,643.63

wD = \$4,148,643.63 / \$17,148,643.63 = 24.19%

wP = \$3,000,000 / \$17,148,643.63 = 17.50%

wRE = \$10,000,000 / \$17,148,643.63 = 58.31%