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Posted: June 22nd, 2020

Finance question – capital structure

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Company X has the following capital structure:

Short Term Debt/Current Portion of Long Term Debt
£1,700,000
Long Term Debt
£9,700,000
Total Equity
£18,000,000
Shares Outstanding
1,700,000
Further, i have following market information from the New Financial Times.
Stock Price (per share)
£ 27
Current Yield to Maturity on outstanding Bond
0.90%
Cost of unlevered equity is 10 %.

Questions:

1.Compute the market Debt to Equity ratio.
2. Compute the cost of levered equity based on market Debt to Equity ratio.
3. Compute the current weighted average cost of capital (WACC).
4. Repeat steps 2 and 3 for Scenario i) issue £1 billion in debt to repurchase stock, and Scenario ii) issue £1 billion in stock to repurchase debt. Briefly comment the results.

 

In light of the above 4 points, I wil need to comment on the statement that “in aperfect capital market, a firm’s choice of capital is unimportant”

I hope you can help with that please?

 

Some notes/assumptions:

-Market value of debt can be approximated by book value of debt

– Debt includes Long term debt and short-term/current portion of long term debt

– Exisiting yield on outstanding bond to be used as cost of debt

– cost of debt capital remains constant

 

I have more questions coming up about same company x

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