The Intel Corporation must raise $1 million to finance the remodeling of its cor
ID: 2732270 • Letter: T
Question
The Intel Corporation must raise $1 million to finance the remodeling of its corporate headquarters. It plans to do this by increasing the number of shares of preferred and common stock and by issuing 15-year corporate bonds with a face value of $1000 and annual payments at a coupon rate of 8.5 percent. The corporation’s long-term debt currently amounts to 20,000 corporate bonds with a current market value of $875/bond. The corporation has 50,000 shares of preferred stock outstanding with a market value of $130/share. The corporation also has 1,500,000 outstanding shares of common stock with a current market value of $55/share. Holders of preferred stock currently receive annual dividends of $5/share, and holders of common stock currently receive annual dividends of $4.00/share. The annual growth rate of common stock is 3 percent. Flotation costs are 1 percent for bonds, 2 percent for preferred stock, and 4.5 percent for common stock. Intel’s tax rate is 34 percent.
Question: What are weights for Intel’s debt, preferred stock and equity based on the market value?
Bond: 11.43%, Preferred Stock: 5.10% and Common Equity: 83.46%Explanation / Answer
Number of bond = 20,000
Current price of bond = $875
Total market value of bond = 20,000 × $875
= $17.5 million
Market value of long term debt = $17.5 million
EQUITY
Number of share outstanding = 1.5 million
Price of stock = $55
Market value of equity = $55 × 1.5 million
= $82.50 million
Market value of equity is $82.50 million.
Preference Share
Number of preference share = 50,000
Price of preference share = $130
Market value of preferred stock = $130 × 50,000
= $6.50 million
Market value of preferred stock is $6.5 million
Hence, cost of preferred stock is 4.62%.
Value of debt in capital Stricture = $17.50 million
Value of equity in capital Stricture = $82.50 million
Value of preferred stock in capital Stricture = $6.50 million
Total value of capital = $106.50 million
Weight of debt in capital structure = 16.43%
Weight of equity in capital structure = 77.46%
Weight of preferred stock in capital structure = 6.10%
Hence, correct answer is option (D).
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