Business Finance8 Exam 2 men COPIA - Word Sign in Insert Draw Design Layout Refe
ID: 2805973 • Letter: B
Question
Business Finance8 Exam 2 men COPIA - Word Sign in Insert Draw Design Layout References Mailings Review View ell me 25. The following information pertains to the capital structure of a firm: (Problem 8) Debt: One thousand bonds with a face value of $1,000 and a 10-year term were iss years ago with a coupon rate of 10%. Today the bonds are selling to yield 10%. Preferred stock: Ten thousand shares of preferred stock are outstanding with a $9 annual dividend and a $100 face value. Today the shares are selling to yield a 9% return. Common equity: 100 thousand shares of common stock are outstanding at a current market price of $30 per share. Develop the firm's market-value based capital structure.Explanation / Answer
1.) Market Price of Bond [Present value of Bond] = par value / (1+market interest)number of payments + interest [1-(1+market interest)- number of payments]/ market interest
= 1000 / (1+ 0.10/2)(10-3)*2 semi annual + [1000*0.10/2] [1-(1+0.10/2)- (10-3)*2]/ (0.10/2)
= 1000 / (1+0.05)14 + 50 [1-(1+0.05)- 14]/ 0.05
= 1000 / (1.05)14 + 50 [1-(1.05)- 14]/ 0.05
= 1000 / (1.05)14 + 1000 [1- 1 / (1.05) 14 ]
= 1000 / 1.97993 + 1000 [1- 1 / 1.97993 ]
= 505.07 + 494.93
= $1000
market value of 1000 bonds = 1000 * $1000
= $1000000
2.) Cost of preferred stock = Dividend / current price
0.09 = $9 / current price
Current price = $100
Market value of preferred stock of 10000 shares = $100 * 10000
=$1000000
3) Market value of 100000 common stock = 100000 * $30
= $3000000
Market value based capital structure:
market value capital structure
Debt $1000000 1000000/5000000 = 20%
preferred stock $1000000 1000000/5000000 = 20%
common stock $3000000 3000000/5000000 = 60%
Total $5000000 100%
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