Question

ere I Sit Sofas has 6,800 shares of common stock outstanding at a price of $91 per share. There are 1,030 bonds that mature in 27 years with a coupon rate of 6.5 percent paid semiannually. The bonds have a parvalue of $1,000 each and sell at 107 percent of par. The company also has 5,700 shares of preferred stock outstanding at a price of $44 per share. What is the capital structure weight of the debt?

Answer 1

The capital structure weight of the debt is 54.25%.

Step-by-step explanation:

To calculate the capital structure weight of the debt, we need to determine the total value of the company's bonds. The number of bonds is given as 1,030, with a par value of $1,000 each. They sell at 107% of par, so the market value of each bond is $1,070. Multiplying the number of bonds by the market value gives us the total value of the bonds, which is $1,030,000. To calculate the capital structure weight of the debt, we divide the total value of the bonds by the sum of the market values of all the securities, which includes the common stock, preferred stock, and bonds.

Market value of common stock = 6,800 shares * $91 per share = $618,800

Market value of preferred stock = 5,700 shares * $44 per share = $250,800

Market value of all securities = $618,800 + $250,800 + $1,030,000 = $1,899,600

Capital structure weight of the debt = $1,030,000 / $1,899,600 = 0.5425 or 54.25%