Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011, appear
ID: 2800006 • Letter: K
Question
Key facts and assumptions concerning FM Foods, Inc. at December 31, 2011, appear below.
Estimate the appropriate weight of equity to be used when calculating FM's weighted average cost of capital.
88.5%
100%
71.4%
67.1%
22.3%
FM Foods, Inc Facts and assumptions as of Dec. 31, 2011 Equity shares outstanding Stock price per share Yield to maturity on company long-term bonds Yield to maturity on long-term government bonds Comp any equity beta Historical excess return on comm on stocks Book value of interest-bearing debt Coupon interest rate on debt Book value of equity Tax rate 20 million $40.00 7.5% 5.6% 1.2 62% $320 million 4.8% $500 million 35%Explanation / Answer
market Value of equity=20*40=800 million
As we are not given the maturity of the bonds we will not be able to calculaye the price and hence market value..We can use market value as book value for debt in this case
Market value of debt=320
Proportion or weight of equity=800/(800+320)=71.4%
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