Question

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JFG, Inc. has the following capital structure:1. 9.4 million shares of common stock priced at $28.12/share2....

JFG, Inc. has the following capital structure:1. 9.4 million shares of common stock priced at $28.12/share2. 3 million shares of preferred stock that pays a 6.7% dividend (par value = $100) and is currently priced at $101/share3. 200,000 outstanding bonds. The bonds mature in 10 years, have a par (face) value of $1,000, a 7% annual coupon, and a yield to maturity of 8.25%.What is the MV weight of Debt JFG would use in their WACC calculation? （Please show me the process. Thanks！）

Expert Solution

Market Value of each capital Structure

Market Value of Debt = $183,412,000 [200,000 Bonds x $917.06 per bond]

Market Value of Preferred Stock = $303,000,000 [3,000,000 shares x $101 per share]

Market Value of Equity = $264,328,000 [9,400,000 shares x $28.12 per share]

Total Market Value = $750,740,000

Price of the Bond

The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value. The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.

Here, the calculation of the Bond Price using financial calculator is as follows


Variables	Financial Calculator Keys	Figures

Face Value [-$1,000]	FV	1,000
Coupon Amount [$1,000 x 7%]	PMT	70
Market Interest Rate or Required Rate of Return [8.25%]	1/Y	8.25
Time to Maturity [10 Years]	N	10
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $917.06

The weight of Debt to be used in the WACC Calculation

Weight of Debt = Market Value of Debt / Total Market Value

= $183,412,000 / $750,740,000

= 0.2443 or

= 24.43%

“Therefore, weight of Debt to be used in the WACC Calculation will be 0.2443 or 24.43%”

jeff jeffy answered 11 months ago

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