Question

Willerton Industries’ long term debt is comprised of 20-year $1,000 face value bonds totaling $65 million issued seven years ago at an 8% coupon rate. The bonds are now selling to yield 6%. Willerton’s preferred is from a single issue of $100 par value totaling $15 million, 9% preferred stock that is now selling to yield 8%. Willerton has four million shares of common stock outstanding at a current market price of $31. Calculate Willerton’s market value based capital structure.

Market value of debt:

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            Market value of preferred stock

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            Total market values

Source of capital	amount	market value	total market value	%
Debt
Preferred stock
Equities
Total

Answer 1

Market value of debt: Cash flows from the bond will occur for 20-7 = 13 more years. The annual cash flow in the form of coupon = 8% of $1000 = $80. Thus the price of a bond = present value of $80 for 13 years and present value of maturity amount of $1,000 at the 13^th year using discount rate of 6%.

(It has been assumed that coupon payments are annual).

= $80*PVIFA(13 years, 6%) + 1000*PVIF(13, 6%)

= $80*8.85268 + 1000*0.46884

= $1,177.05

No. bonds = $65 million/$1000 = 65,000. Thus market value = price of bond*no. of bonds

= $1177.05*65,000

= $76,508,487.85

Market value of preferred stock: Dividend per share = 9% of $100 = $9

No. of shares = $15 million/$100 = 150,000 shares

Value of 1 share = dividend/yield = $9/0.08 = 112.5. Thus total market value of preferred stock = $112.50*150,000 shares

= $16,875,000

Market value of equities = 4 million shares * $31 = $124,000,000

Source of capital	Amount	Market value	Total market value	%
Debt	1,000.00	1,177.05	76,508,487.85	35.20
Preferred Stock	100.00	112.50	16,875,000.00	7.76
Equities	10.00	31.00	124,000,000.00	57.04
Total	1,110.00	1,320.55	217,383,487.85	100.00