Question

Hankins corporation has 5.4 million shares of common stock outstanding; 290,000 shares of 5.2 percent preferred stock outstanding, par value of $100; and 125,000 5.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $72 per share and has a beta of 1.13, the preferred stock currently sells for $103 per share, and the bonds have 20 years to maturity and sell for 103 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 4.3 percent, and the firms tax rate is 23 percent. What is the firms market value capital structure?

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=72*5400000

=388800000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*125000*1.03

=128750000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=103*290000

=29870000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=388800000+128750000+29870000

=547420000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 388800000/547420000

W(E)=0.7102

Weight of debt = MV of Bond/MV of firm

Weight of debt = 128750000/547420000

W(D)=0.2352

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 29870000/547420000

W(PE)=0.0546