Question

Blackboard →XCO Remaining Time: 1 hour, 33 minutes, 38 seconds. Question Completion Status: 1 Question 2 5 points Olympus Inc. is a toys maker based in Boston. The business is financed by 1.000.000 common shares which are worth at $31.50 per share. The company has issued 54.5 milion in preferred stocks and borrowed 59 million from the bank. The corporation tax is 40%. A. What is the market value of common equity used to fund the business? (1 marks) B. What is the capital structure of Olympus Inc.? (1 mark) C. Briefly explain the risk characteristics of preferred stocks compared types of funding and why they are considered to be similar to debt finance marks) TTTT Paragraph Aral (12pt) - E-T.... %DO QEZETT .---. Of Moss - Wordt Path Question 2017 Moving to another question will save this response

Answer 1

1.

Common shares outstanding = 1,000,000 shares

Worth of each share = $31.50

Market value of common equity used = 1000000*31.50 = $31,500,000

(Preferred equity is not a part of common equity)

2.

The capital structure of the company:

Equity:

Common Equity worth = $31,500,000

Preferred equity worth = $4,500,000

Total equity = $36,000,000

Debt:

Barrowing from bank = $9,000,000

Debt to Equity ratio = Dedt / Equity = $9,0000,000 / $36,000,000 = 1:4

3.

Risk characteristics of preference shares:

• Preferred stock involves high dividend payout
• The dividend arears accumulate when the preference share are of cumulative class
• It is a costly option when compared to other modes of finance

The preference are considered similar to the debt finance because the dividend payout and redumption conditions is fixed and pre determined.