Question

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
​$1010 million face value	1.51.5 million shares outstanding	5.25.2 million shares outstanding
Coupon rateequals=44​%	Face valueequals=​$88 per share	Market price of shareequals=​$2626
Annual coupons	Dividend rate ​(annual)equals=1111​%
Time to maturityequals=1010 years	Equivalent preferred shares yield 66​%
YTMequals=77​%

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.?

Round to two decimal places

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =10

Bond Price =∑ [(4*1000/100)/(1 + 7/100)^k]     +   1000/(1 + 7/100)^10

k=1

Bond Price = 789.29

Preferred dividend = par value*dividend% = 8*0.11=0.88

Price = dividend/yield = 0.88/0.06=14.67

a

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*10000*0.78929

=7892900

b

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=14.67*1500000

=22005000

c

MV of equity=Price of equity*number of shares outstanding

MV of equity=26*5200000

=135200000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 135200000/165097900

W(E)=0.8189 = 81.89%

Weight of debt = MV of Bond/MV of firm

Weight of debt = 7892900/165097900

W(D)=0.0478 = 4.78%

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 22005000/165097900

W(PE)=0.1333 = 13.33%