Question

Chesterfield and Weston has 55,000 shares of common stock outstanding at a price of $31 a share. It also has 3,000 shares of preferred stock outstanding at a price of $62 a share. The firm has 8 percent, 12-year bonds outstanding with a total face value of $400,000. The bonds are currently quoted at 101.2 percent of face and pay interest semiannually. What is the capital structure weight of the firm's debt if the tax rate is 35 percent

Answer 1

E = 74.27%

Preferred = 8.10%

Debt = 17.63%

Step-by-step explanation:

We are asked for the structure weight.

Equity 55,000 shares x 31 = 1,705,000

Preferred stock 3,000 x 62 = 186,000

Debt 400,000 x 101.2/100 = 404,800

Value of the Firm 2,295,800‬

Now we divide each component by the value of the firm.

Equity weight 1,705,000/2,295,800 = 0,742660 = 74.27%

Preferred stock 186,000 / 2,295,800 = 0,081017 = 8.10%

Debt 404,800/ 2,295,800 = 0,17632197 = 17.63%