Question

Saint Nick Enterprises has 17,500 shares of common stock outstanding at a price of $69 per share. The company has two bond issues outstanding. The first issue has 7 years to maturity, a par value of $1,000 per bond, and sells for 101.5 percent of par. The second issue matures in 21 years, has a par value of $2,000 per bond, and sells for 106.5 percent of par. The total face value of the first issue is $250,000, while the total face value of the second issue is $350,000. What is the capital structure weight of debt

Answer 1

total weight of debt = 0.343 or 34.3%

Step-by-step explanation:

stock's market value = 17,500 x $69 = $1,207,500

bond₁'s market value = $250,000 x 101.5% = $256,750

bond₂'s market value = $350,000 x 106.5% = $372,750

total market value of the firm = $1,837,000

weighted capital structure:

market value weight

stocks $1,207,500 0.657

bond₁ $256,750 0.140

bond₂ $372,750 0.203

total $1,837,000 1

total weight of debt = 0.343 or 34.3%