In: Finance
Bea Kerr is an analyst in the treasurer's office at MupetLabs Inc. Mr. Kerr needs your help to estimate the market value weights for MupetLabs' cost of capital. MupetLabs has long-term bonds outstanding, preferred shares outstanding and common shares. Selected information for each of the securities is provided in the table below. Long-term Debt Preferred Shares Common Shares $20 million face value 1.5 million shares outstanding 5.3 million shares outstanding Coupon rateequals5.5% Face valueequals$8 per share Market price of shareequals$23 Annual coupons Dividend rate (annual)equals10% Time to maturityequals7 years Equivalent preferred shares yield 6% YTMequals9%
a. What is the market value of long-term debt?
b. What is the market value of preferred shares?
c. What are the capital structure weights for MupetLabs Inc.?
Answer a.
Long-term Debt:
Face Value = $20,000,000
Annual Coupon Rate = 5.50%
Annual Coupon = 5.50% * $20,000,000
Annual Coupon = $1,100,000
Time to Maturity = 7 years
Annual YTM = 9.00%
Market Value = $1,100,000 * PVIFA(9.00%, 7) + $20,000,000 *
PVIF(9.00%, 7)
Market Value = $1,100,000 * (1 - (1/1.09)^7) / 0.09 + $20,000,000 *
(1/1.09)^7
Market Value = $1,100,000 * 5.032953 + $20,000,000 * 0.547034
Market Value = $16,476,928
Answer b.
Preferred Shares:
Number of Shares = 1,500,000
Face Value per share = $8.00
Dividend Rate = 10.00%
Equivalent Yield = 6.00%
Annual Dividend = Dividend Rate * Face Value per share
Annual Dividend = 10.00% * $8.00
Annual Dividend = $0.80
Price per share = Annual Dividend / Equivalent Yield
Price per share = $0.80 / 0.06
Price per share = $13.333333
Market Value = Number of Shares * Price per share
Market Value = 1,500,000 * $13.333333
Market Value = $20,000,000
Answer c.
Common Shares:
Number of Shares = 5,300,000
Market Price per share = $23.00
Market Value = Number of Shares * Market Price per share
Market Value = 5,300,000 * $23.00
Market Value = $121,900,000
Market Value of Firm = Market Value of Long-term Debt + Market
Value of Preferred Shares + Market Value of Common Shares
Market Value of Firm = $16,476,928 + $20,000,000 +
$121,900,000
Market Value of Firm = $158,376,928
Weight of Long-term Debt = Market Value of Long-term Debt /
Market Value of Firm
Weight of Long-term Debt = $16,476,928 / $158,376,928
Weight of Long-term Debt = 0.1040
Weight of Preferred Shares = Market Value of Preferred Shares /
Market Value of Firm
Weight of Preferred Shares = $20,000,000 / $158,376,928
Weight of Preferred Shares = 0.1263
Weight of Common Shares = Market Value of Common Shares / Market
Value of Firm
Weight of Common Shares = $121,900,000 / $158,376,928
Weight of Common Shares = 0.7697