To calculate the market value of each component of the capital structure, we need the following information:
The number of shares outstanding (common stock)
The market price per share (common stock)
The par value per share (preferred stock)
The dividend rate (preferred stock)
The face value of the bond issue (debt)
The coupon rate (debt)
The number of years to maturity (debt)
Assuming the following values:
Number of shares outstanding = 500,000
Market price per share = $60
Par value per share = $100
Dividend rate = 8%
Face value of the bond issue = $10,000,000
Coupon rate = 10%
Number of years to maturity = 10
We can calculate the market value of each component as follows:
Common stock:
Market value of common stock = Number of shares outstanding x Market price per share
Market value of common stock = 500,000 x $60
Market value of common stock = $30,000,000
Preferred stock:
Market value of preferred stock = Number of shares outstanding x Par value per share
Market value of preferred stock = 500,000 x $100
Market value of preferred stock = $50,000,000
Debt:
Market value of debt = Face value of bond issue x (1 - 1 / (1 + r)^n) / r + Face value of bond issue / (1 + r)^n
where r = coupon rate, n = number of years to maturity
Market value of debt = $10,000,000 x (1 - 1 / (1 + 0.10)^10) / 0.10 + $10,000,000 / (1 + 0.10)^10
Market value