Utilty Muffin Research Kitchen Inc. is financed with debt, preferred stock and c
ID: 2708346 • Letter: U
Question
Utilty Muffin Research Kitchen Inc. is financed with debt, preferred stock and common equity. Selected information for each of the securities is provided below. Calculate the capital structure weights which would be used to calculate the weighted average cost of capital.
Long-term Debt:
$5M face value, Coupon Rate = 3.5%, Annual Coupons, Time to Maturity = 10 years, YTM = 5%
Preferred Shares
0.5M Shares Outstanding, Par Value = $10 per shre, Dividend Rate (annual) = 4%, equivalent preferred shares yield 7%.
Explanation / Answer
Market value of Capital Structure
Long term debt = 175000PVIFA(5%,10) + 5000000*PVIF(5%,10) = $ 4420869.88
Prefered Share = 0.4/7% * 500000 = 2857142.86
Total Market value = $ 4420869.88 + 2857142.86 = 7278012.74
Weight of Long term debt = 4420869.88/7278012.74 = 0.6074 or 60.74%
Weight of Prefered Share = 2857142.86/7278012.74 = 0.3926 or 39.26%
Answer:
Weight of Long term debt= 0.6074 or 60.74%
Weight of Prefered Share = 0.3926 or 39.26%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.