Question

Here i sit sofas has 7,100 shares of common stock outstanding at a price of $94 per share. there are 600 bonds that mature in 30 years with a coupon rate of 6.8 percent paid semiannually. the bonds have a par value of $2,000 each and sell at 108.5 percent of par. the company also has 6,000 shares of preferred stock outstanding at a price of $47 per share. what is the capital structure weight of the debt? multiple choice

O 0.5783
O 0.6236
O 0.2964
O 0.7036
O 0.6550

Answer 1

The capital structure weight of the debt is calculated by dividing the total market value of the company's debt by the sum of the market values of all the company's securities. For Here I Sit Sofas, the weight of the debt comes out to 0.5783, meaning that debt constitutes approximately 57.83% of the total financing.

option a is the correct

Step-by-step explanation:

To calculate the capital structure weight of the debt, we must first determine the total market value of the company's debt and equity. We then find the proportion of debt in the company's overall capital structure.

Here's how we do it step by step:

1. Calculate the market value of the common stock: 7,100 shares × $94 per share = $667,400.
2. Calculate the market value of the bonds: 600 bonds × $2,000 × 108.5% = $1,302,000.
3. Calculate the market value of the preferred stock: 6,000 shares × $47 per share = $282,000.
4. Add the market values to get the total market value of the firm's securities: $667,400 (common stock) + $1,302,000 (bonds) + $282,000 (preferred stock) = $2,251,400.
5. Finally, divide the market value of the bonds by the total market value of the firm's securities to find the capital structure weight of the debt: $1,302,000 / $2,251,400 = 0.5783.

Therefore, the capital structure weight of the debt is 0.5783, which represents the proportion of the company's total capital that is financed through debt.