Question

Kim's Bridal Shoppe has 11,600 shares of common stock outstanding at a price of $50 per share. It also has 285 shares of preferred stock outstanding at a price of $92 per share. There are 320 bonds outstanding that have a coupon rate of 6.9 percent paid semiannually. The bonds mature in 31 years, have a face value of $2,000, and sell at 109 percent of par. What is the capital structure weight of the common stock?

.3989

.4864

.4654

.5350

.4448

Galvatron Metals has a bond outstanding with a coupon rate of 6.6 percent and semiannual payments. The bond currently sells for $1,856 and matures in 22 years. The par value is $2,000 and the company's tax rate is 39 percent. What is the company's aftertax cost of debt?

rev: 07_14_2018_QC_CS-131353

4.69%

3.39%

3.63%

4.09%

4.43%

Answer 1

Answer 1.

Debt:

Number of bonds outstanding = 320
Face Value = $2,000
Current Price = 109%*$2,000 = $2,180

Value of Debt = 320 * $2,180
Value of Debt = $697,600

Preferred Stock:

Number of shares outstanding = 285
Current Price = $92

Value of Preferred Stock = 285 * $92
Value of Preferred Stock = $26,220

Equity:

Number of shares outstanding = 11,600
Current Price = $50

Value of Common Stock = 11,600 * $50
Value of Common Stock = $580,000

Value of Firm = Value of Debt + Value of Preferred Stock + Value of Common Stock
Value of Firm = $697,600 + $26,220 + $580,000
Value of Firm = $1,303,820

Weight of Common Stock = $580,000/$1,303,820
Weight of Common Stock = 0.4448

Answer 2.

Face Value = $2,000
Current Price = $1,856

Annual Coupon Rate = 6.6%
Semiannual Coupon Rate = 3.30%
Semiannual Coupon = 3.30%*$2,000 = $66

Time to Maturity = 22 years
Semiannual Period to Maturity = 44

Let semiannual YTM be i%

$1,856 = $66 * PVIFA(i%, 44) + $2,000 * PVIF(i%, 44)

Using financial calculator:
N = 44
PV = -1,856
PMT = 66
FV = 2000

I = 3.63%

Semiannual YTM = 3.63%
Annual YTM = 2 * 3.63%
Annual YTM = 7.26%

Before-tax Cost of Debt = 7.26%
After-tax Cost of Debt = 7.26% * (1 - 0.39)
After-tax Cost of Debt = 4.43%