Question

What proportion of each source of capital does DragonFlights use?

Answer 1

Q1:

Value of equity E =share price*no of shares =116*1 million =116 million

Value of debt D=no of bonds * bond price =50000*1250 = 62.5 million

Total value V= 116+62.5 =178.5

Proportion of equity = E/V =116/178.5 =64.98%

Proportion of Debt =D/V= 62.5/178.5 =35.01%

Q2:

cost of equity = risk free rate+ beta*market risk premium

=2.5+2.8*7 =22.1%

Q3:

cost of debt =YTM=10.9%

cost of debt is the YTM of the bond which can be calculated as below;

Bond cashflows
Years	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24	25	26	27	28	29	30	31	32	33	34	35	36	37	38	39	40
Price	1250
Coupon payment	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70
Par value																																									1000
Total cashflows	-1250	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	70	1070
IRR	5.45%
YTM= 2*IRR	10.90%