Organic Produce Corporation has 7.5 million hsares of common stock outstanding,

Question

Organic Produce Corporation has 7.5 million hsares of common stock outstanding, 500,000 shares of 7 percent preferred stock outstanding, and 175,000 of 8.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64 per share and ahs a beta of 1.2, the preferred stock currently sells for $108 per share, and the bonds have 15 years to maturity and sell for 96 percent of par. THe market risk premium is 6.8 percent, T-bills are yielding 5.5 percent, and the firm's tax rate is 34percent.
a. What is the frim's market value capital structure?
b. If the firm is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?

Explanation / Answer

(a) We will begin by nding the market value of each type of nancing. We nd:

MVD = 175,000 x 1,000 x 0.96 = $168M

MVE = 7.5M x 64 = $480 M

MVP = 500,000 x96 = $48M

And the total market value of the rm is:

V = 168 + 480M + 48M = $696 M

o, the market value weights of the companys
nancing is:

D/V = 168 /696= .24

P/V = $48M /696= .06

E/V = 480/696 = .68

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