Question

Problem 13-7

Five years ago Hemingway Inc. issued 6,000 30-year bonds with par values of $1,000 at a coupon rate of 6%. 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 13%. Its common stock is selling at $21, and 200,000 shares are outstanding. Assume that the coupon payments are semi-annual. Calculate Hemingway's market value based capital structure. Round the values to the nearest dollar and the weights to two decimal places. Round PVF and PVFA values in intermediate calculations to four decimal places. Do not round other intermediate calculations.

Component	Value	Capital Structure
Debt	$	%
Preferred stock		%
Equity		%
Total Capital	$	%

Answer 1

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =25x2

Bond Price =∑ [(6*1000/200)/(1 + 5/200)^k]     +   1000/(1 + 5/200)^25x2

k=1

Bond Price = 1141.81

Preferred equity price = dividend/yield = 6.5/0.13 = 50

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

MV of equity=21*200000

=4200000

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

MV of Bond=1000*6000*1.14181

=6850860

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=50*15000

=750000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=4200000+6850860+750000

=11800860

Weight of equity = MV of Equity/MV of firm

Weight of equity = 4200000/11800860

W(E)=0.3559 = 35.59%

Weight of debt = MV of Bond/MV of firm

Weight of debt = 6850860/11800860

W(D)=0.5805 = 58.05%

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 750000/11800860

W(PE)=0.0636 = 6.36%

Component	Value	Capital Structure
Debt	6850860	58.08
Preferred stock	750000	6.36
Equity	4200000	35.59
Total Capital	11800860	100