Santa Claus Enterprises has 87,000 shares of common stock outstanding at a curre

Question

Santa Claus Enterprises has 87,000 shares of common stock outstanding at a current price of $39 a share. The firm also has two bond issues outstanding. The first bond issue has a total face value of $230,000, pays 7.1 percent interest annually, and currently sells for 103.1 percent of face value. The second bond issue consists of 5,000 bonds that are selling for $887 each. These bonds pay 6.5 percent interest annually and mature in eight years. The tax rate is 35 percent. What is the capital structure weight of the firm's debt?

51.39 percent

71.86 percent

60.52 percent

55.50 percent

57.93 percent

Explanation / Answer

Value of Common stock = 87000 *39 = 3,393,000

Value of bond 1 = 230,000 * 103.1% = 237,130

Value of bond 2 = 5000 * 887 = 4,435,000

Total capital = 8,065,130

Total bond value = 4,435,000+ 237,130 = 4672130

Weight of debt = 4,672,130 / 8,065,130 = 57.93%

correct option is "E" -57.93%

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