Question

Bryan Mining Corporation has 7.5 million shares of common stock outstanding, 280,000 shares of 4% preferred stock outstanding, and 180,000 6% semiannual coupon bonds outstanding, par value $1000 of each. The common stock currently sells for $50 per share and has a beta of 1.6, the preferred stock currently sells for $45 per share, and the bonds have 24 years to maturity and sell for 130.67% of par. The market risk premium is 8%, T-bills are yielding 3% and the company's tax rate is 21%. Calculate the weights if each source of capital (debt, preferred stock, & common stock).

Answer 1

Step-by-step explanation:

To find the weight, calculate the market values of each;

Market value = price * number of outstanding..

Market value of common stock = $50* 7,500,000 = $375,000,000

Market value of preferred stock = $45*280,000 = $12,600,000

Market value of debt = 1.3067* $1,000* 180,000 = $235,206,000

Total market value = $622,806,000

Next, use the above market values to calculate each weight;

Weight of common stock = $375,000,000 /$622,806,000 = 0.6021 or 60.21%

Weight of preferred stock = $12,600,000 /$622,806,000 = 0.0202 or 2.02%

Weight of debt = $235,206,000 /$622,806,000 = 0.3777 or 37.77%