Ray Stokes is raising capital for a new company called NO Balloons Inc.NO Balloons will manufacture and sell festive balloons.Because of the shortage of helium,the balloons will be filled with nitrous oxide instead.NO Balloons plans to finance the business with common equity and long-term debt.It plans to sell 12 million shares of common stock and 200,000 bonds.Each bond will have a coupon rate of 5%,will pay its coupons semi-annually and will have a face value of $1,000.The common stock will be issued at a price of $19.5 a share and has a beta of 1.1.The bonds will sell for 89% of face value and have a 6.25% yield to maturity.The market risk premium is 5.25%,T-bills are yielding 3.5%,and NO Balloons' tax rate is 36%.What is the capital structure weight for equity for NO Balloons?

Question

Quizplus · Accepted Answer

Step 1 - Calculate the value of the firm's securities. V = E + D E = $19.50 × 12M = $234MD = 1,000 × 0.89 × 200,000 = $178MV = $234M + $178M = $412M Step 2 - Calculate the weight of debt and equity. W_d = D/V W_d = $178 / $412 = 43.20% W_e = E/V W_e = $234 / $412 = 56.80% or 57%

Ray Stokes Is Raising Capital for a New Company Called