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Western Electric has 35,000 ordinary shares outstanding at a price per share of $47 and a rate of return of 13.5%. The firm has 5,000 preference shares paying 7% dividend outstanding at a price of $58 a share. The preferred share has a par value of $100. The outstanding bond has a total face value of $450,000 and currently sells for 102% of face. The pre-tax yield-to-maturity on the bond is 8.49%.
Required:a) Calculate the total market value of the firm.
Market value is calculated by, MV= Firm’s Cash flow / WACC , isn’t it ?
WACC can be calculated, but what is the firm’s cash flow in this scenario ? Is that hidden or needs to be calculated ? If needs to be calculated how do I do in following scenario ?MV of the firm is sum of MV of various form of finances.
Can we calculate in this scenario MV of ordinary shares per share is $47, preference shares is $58 a share and bond is $450,000 in total and adding this ?MV of Equity 1,645,000.00 [47*350000]
MV of Preference Share 290,000.00 [58*5000]
MV of Bond 450,000.00
MV of the company 2,385,000.00 [total of above]Please do guide me through this.
b) Calculate the capital structure of the firm.
Isn’t Capital structure of firm means that how much equity, preference share and debt financed ?the MV of equity, PS and bonds divided by total MV gives the capital structure of firm, isn’t it ?
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers (BPP or Kaplan) – they have answers and explanations!
You do not need to know that cash flows for the firm because the question tells you the market values!!
So the total market value of the firm is as you have written it (except for the fact that the market value of the bond is 102% of 450,000).
The capital structure is as you describe it.
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