Question

VULUI 21 14 points! The following information pertains to a firm's outstanding securities Debt 1.500 bonds with a face value of $1000 and a 10-year term were issued three years ago with an annual coupon rate of 10%. They sell to yield 10% Preferred 5.000 shares of preferred stock with a $9 annual dividend and a $100 face Stock value. They sell to yield a 9% return Common 100,000 shares at common stock at a current market price of $30 per share. Stock The firm's current market value capital structure is: Debt Preferred Common none of these 40.0% 20.0% 40.0% Debt 30.0%

Answer 1

Market Value of Common Equity = Share Price * Shares Outstanding = $30 * 100,000 = $3,000,000

Preferred share price = Annual Dividend / Rate of return = $9 / 0.09 = $100

Market Value of Preferred Equity = Preferred Share Price * Shares Outstanding

= $100 * 5,000 = $500,000

When the coupon rate is equal to YTM, the bond sells at par, i.e., $1,000

Market Value of Debt = Bond Price * Bonds Outstanding

= $1,000 * 1,500 = $1,500,000

Total Market Value = Market Value of Debt + Market Value of Preferred Equity + Market Value of Common Equity

= $1,500,000 + $500,000 + $3,000,000 = $5,000,000

Weight of Debt = Market Value of Debt / Total Market Value

= $1,500,000 / $5,000,000 = 0.3, or 30%

Weight of Preferred Equity = Market Value of Preferred Equity / Total Market Value

= $500,000 / $5,000,000 = 0.1, or 10%

Weight of Common Equity = Market Value of Common Equity / Total Market Value

= $3,000,000 / $5,000,000 = 0.6, or 60%