Question

Saint Nick Enterprises has 19,500 shares of common stock outstanding at a price of $79 per...

Saint Nick Enterprises has 19,500 shares of common stock outstanding at a price of $79 per share. The company has two bond issues outstanding. The first issue has 8 years to maturity, a par value of $2,000 per bond, and sells for 96.5 percent of par. The second issue matures in 22 years, has a par value of $1,000 per bond, and sells for 95.5 percent of par. The total face value of the first issue is $350,000, while the total face value of the second issue is $450,000. What is the capital structure weight of debt?

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Answer #1
MV of equity=Price of equity*number of shares outstanding
MV of equity=79*19500
=1540500
MV of Bond1=Par value*bonds outstanding*%age of par
MV of Bond1=2000*175*0.965
=337750
MV of Bond2=Par value*bonds outstanding*%age of par
MV of Bond2=1000*450*0.955
=429750
MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2
=1540500+337750+429750
=2308000
Weight of debt = MV of Bond/MV of firm
Weight of debt = 767500/2308000
W(D)=0.3325
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