Ahmed Company has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $5,000 each. The common stock currently sells for $34 per share (Par value= $10) and has a beta of 1.25, the preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for 114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and Ahmed Company tax rate is 36 percent. a. What is the firm’s market value capital structure? b. If Ahmed Company is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? If we use debt 35%, preferred stock 15% and common stock 50%, what will be the discount rate by assuming same cost of each financing?
Ahmed Company has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent
preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $5,000
each. The common stock currently sells for $34 per share (Par value= $10) and has a beta of 1.25, the
preferred stock currently sells for $91 per share, and the bonds have 15 years to maturity and sell for
114 percent of par. The market risk premium is 7.5 percent, T-bills are yielding 4 percent, and Ahmed
Company tax rate is 36 percent.
a. What is the firm’s market value capital structure?
b. If Ahmed Company is evaluating a new investment project that has the same risk as the firm’s typical
project, what rate should the firm use to discount the project’s cash flows? If we use debt 35%, preferred
stock 15% and common stock 50%, what will be the discount rate by assuming same cost of each
financing?
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