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27 January, 19:13

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?

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  1. 27 January, 20:41
    0
    0.64189

    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.
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