A firm has a capital structure containing 40 percent debt,10 percent preferred stock,and 50 percent common stock equity.The firm's debt has a yield to maturity of 9.50 percent.Its preferred stock's annual dividend is $7.50 and the preferred stock's current market price is $50.00 per share.The firm's common stock has a beta of 0.90 and the risk-free rate and the market return are currently 4.0 percent and 13.5 percent,respectively.The firm is subject to a 40 percent marginal tax rate.The market value of debt is $100 million.How many shares of preferred stock should be outstanding for the capital structure to be correct?

Question

Quizplus · Accepted Answer

debt = 40 % of total value
$100 = .40 * Firm value
Firm value = $100/0.40 = $250
Preferred market value = .10 * $250 = $25 million
MV = # of shares * price = $25 million = X * $50

A Firm Has a Capital Structure Containing 40 Percent Debt,10