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Five year ago Hemingway Inc issued 6,000 30 year bonds with par values of $1,000 at...

Five year ago Hemingway Inc issued 6,000 30 year bonds with par values of $1,000 at a coupon rate of 8%. The bonds are now selling to yield 5%. The company also has 15,000 shares of preferred stock outstanding that pay a dividend of $6.50 per share. These are currently selling to yield 10%. Its common stock is selling at $21, and 200,000 shares are outstanding. Calculate Hemingway

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Answer #1

Par value of Bond = 1000
Yield = 5%
Coupon = 8%
Coupon = 8%*1000 = 80
Number of Periods = 30
Price of Bond s= PV of Coupons + Pv of par value = 80*(1-(1+5%)^-30/5%+1000/(1+5%)^30 = 1461.753508
Market Value of Debt = 6000*1461.753508= 8,767,041.18

Price of Preferred Stock = Dividend/Yield = 6.5/10% = 65
Market value of Preferred Stock = 65*15000 = 975,000

Market Value of equity = 200000*21 = 4,200,000

Total Value = 8,767,041.18+975000+4200000 = 13942041.18

Weight of Debt = 8,767,041.18/13942041.18 = 62.88%
Weight of Preferred Stock = 975000/13942041.18 = 6.99%
Weight of Equity = 4200000/13942041.18 = 30.12%

Please discuss in case of doubt. God Bless

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