Question

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 $.

1. Compute the price of each bond

2. Compute the total market value of debt outstanding

3. Compute the total market value of preferred stock

4. Compute the weights of each source of financing

Answer 1

Price of bond is equal to the present value of all future coupon payments and the principal amount

= 1000*8%*PVAF(10%, 20 years) + 1,000*PVF(10%, 20 years)

= 80*8.51356 + 1,000*0.14864

= $829.72

B. Total market value of debt outstanding = 829.72*5,000

= $4,148,600

C.total market value of preferred stock = 30*100,000

= 3,000,000

D.weight of debt = 4,148,600/(4,148,600+3,000,000+10,000,000)

=4,148,600/17,148,600

= 24.19%

Weight of preferred stock = 3,000,000/17,148,600

= 17.49%

Retained earnings = 10,000,000/17,148,600

= 58.31%