Question

Further From Center has 11,800 shares of common stock outstanding at a price of $52 per share. It also has 295 shares of preferred stock outstanding at a price of $94 per share. There are 340 bonds outstanding that have a coupon rate of 7.1 percent paid semiannually. The bonds mature in 33 years, have a face value of $2,000, and sell at 110 percent of par. What is the capital structure weight of the preferred stock?

Answer 1

The capital structure weight of the preferred stock is calculated by dividing the market value of the preferred stock by the total market value of all securities, which includes common stock, preferred stock, and bonds.

Step-by-step explanation:

The capital structure weight of the preferred stock can be calculated by determining the proportion of preferred stock's value in the total market value of the company's equity and debt. To calculate the total market value, we need to sum up the market values of the common stock, the preferred stock, and the bonds issued by the company.

Firstly, the market value of the common stock is calculated by multiplying the number of common shares outstanding with the price per share:

• 11,800 shares × $52/share = $613,600

Next, the market value of the preferred stock is found similarly:

• 295 shares × $94/share = $27,730

The market value of the bonds is calculated by considering that they sell at 110% of par, so their market value is:

• 340 bonds × $2,000/bond × 110% = $748,000

Finally, the capital structure weight of the preferred stock is calculated by dividing the market value of the preferred stock by the total market value of all securities:

Capital structure weight of preferred stock = $27,730 / ($613,600 + $27,730 + $748,000)

This results in the preferred stock constituting a specific percentage of the entire capital structure of the company.

Answer 2

The correct answer is 0.02.

Step-by-step explanation:

According to the scenario, computation of the given data are as follows:

Common stock shares = 11,800 shares

Common stock share price = $52 per share

So, total value of common stock = 11,800 × $52 = $613,600

Preferred stock shares = 295 shares

Preferred stock share price = $94 per share

So, total value of Preferred stock = 295 × $94 = $27,730

Bonds outstanding = 340

Bond price = $$2,000 and Sell at 110% of par.

So, total value of outstanding bond = 340 (2,000 × 110%) = $748,000

So, Capital structure weight of Preferred stock = total value of Preferred stock ÷ Total value of all stock.

= $27,730 ÷ ( $613,600 + $27,300 + $748,000)

= $27,730 ÷ $1,388,900

= 0.019 or 0.02