Question

A company has 14 million common shares outstanding with a current price $50 and the book value of $18 a share and a beta of 1.88. They also have two bond issues outstanding. The first bond issue has a book value of $100 million, coupon rate of 11% and currently sells at 125.678% of par. The second bond issue is a zero coupon bond with a book value of $50 million and currently sells at 43%. Maturity of both bonds is 15 years. The tax rate is 45%. The market return is 8% and the T-bill rate is 3.5%. What are capital structure weights on a market value basis? (Pls. Details pls. Thx)

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=50*14000000

=700000000

MV of Bond1=Par value*bonds outstanding*%age of par

MV of Bond1=1000*100000*1.25678

=125678000

MV of Bond2=Par value*bonds outstanding*%age of par

MV of Bond2=1000*50000*0.43

=21500000

MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2

=700000000+125678000+21500000

=847178000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 700000000/847178000

W(E)=0.8263

Weight of debt = MV of Bond/MV of firm

Weight of debt = 147178000/847178000

W(D)=0.1737