If the market risk premium is 6.5%, the market risk-free rate and company has th
ID: 2791706 • Letter: I
Question
If the market risk premium is 6.5%, the market risk-free rate and company has the following:
Common Stock: 7,500,000 shares outstanding, selling at $35 per share, beta 1.3
Preferred Stock: 200,000 shares outstanding, 5% yield, selling at $100 per share
Debt: 125,000 6% semiannual bonds outstanding, par value $1000 each with 15 years to maturity, selling at 112% of par
Tax Rate: 30%
Calculate the company`s market value
Calculate the percentage of the market value capital structure that is debt
Calculate the percentage of the market value capital structure that is common shares
Calculate the percentage of the market value capital structure that is preferred shares
Explanation / Answer
Common shares = 7500000*35 = 262500000
Preferred shares = 200000*100 = 20000000
Debt = 125000*1120 = 140000000
Company's market value = 262500000 + 20000000 + 140000000 = 422500000
% debt = 140000000/422500000 = 0.3314 = 33.14%
% common shares = 262500000/422500000 = 0.6213 = 62.13%
% preferred shares = 20000000/422500000 = 0.0473 = 4.73%