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Saint Nick Enterprises has 17,900 shares of common stock outstanding at a price of $71 per share. The company has two bond issues outstanding. The first issue has 9 years to maturity, a par value of $1,000 per bond, and sells for 102.5 percent of par. The second issue matures in 23 years, has a par value of $2,000 per bond, and sells for 107.5 percent of par. The total face value of the first issue is $270,000, while the total face value of the second issue is $370,000. What is the capital structure weight of debt?

Respuesta :

Answer:

the capital structure weight of debt is 0.3467

Explanation:

The computation of the capital structure weight of debt is as follows:

Total firm value be

= 17,900 shares × $71 + $270,000 × 102.5% + $370,000 × 107.5%

= $1,270,900 + $276,750 + $397,750

= $1,945,400

Now the weight of debt is

= ($276,750 + $397,750) ÷ ($1,945,400)

= 0.3467

Hence, the capital structure weight of debt is 0.3467

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