Question

Here I Sit Sofas has 8,000 shares of common stock outstanding at a price of $103 per share. There are 960 bonds that mature in 39 years with a coupon rate of 7.7 percent paid semiannually. The bonds have a par value of $2,000 each and sell at 113 percent of par. The company also has 6,900 shares of preferred stock outstanding at a price of $56 per share. What is the capital structure weight of the debt?

Answer 1

0.64189

Step-by-step explanation:

The computation of capital structure weight of the debt is shown below:-

Equity market value = number of shares × Price per share

= 8,000 × $103

= $824,000

Current debt value =Number of bonds × Price per bond

= 960 × (1.13 × $2,000)

= $2,169,600

Preferred stock value = Number of shares × Price per share

= 6,900 × $56

= $386,400

Total capital = Common equity value + Debt value + Preferred stock value

= $824,000 + $2,169,600 + $386,400

= $3,380,000

Weight of debt = Debt value ÷ Total capital

= $2,169,600 ÷ $3,380,000

= 64.18% or 0.64189

So, for computing the weight of the debt we simply applied the above formula.