Question

A company has 800 bonds outstanding with a par value of $1,000 and priced at 95% of par. It also has 40,000 shares of common stock outstanding with a book value per share of $50 and market price per share of $60. Calculate the capital-structure weights for the firm (as if you were calculating the firm’s Weighted Average Cost of Capital).

Answer 1

Bonds = 24%

Shares = 76%

Step-by-step explanation:

The weight of each of the finance sources is the proportion that their market value bears to the total market value.

This is computed as follows:

$

Market value of bonds= 95%× 1,000× 800= 760,000

Market value of shares = 60× 40,000= 2,400,000

Total market value 3,160,000

Bonds = 760,000/3,160,000× 100= 24%

Shares = 2400000/3,160,000× 100= 76%