Question

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

Answer #1

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%

Q1. Company 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 $.
Compute the price of each bond
Compute the total market value of debt
outstanding
Compute the total market value of preferred
stock
Compute the weights of each source of
financing

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