Introduction to Finance

Security
Current 
Price
Number 
Outstanding
AA bonds 
$1,050
10,000 bonds
A bonds 
1,025
20,000 bonds
Preferred stock 
40
250,000 shares
Common stock 
50
700,000 shares
To begin, Eastnorth Manufacturing’s target capital structure of one-third debt and two-
thirds common equity leaves no room for preferred stock. Eastnorth Manufacturing’s man-
agement has decided not to raise funds with new preferred stock issues. Using the given 
information, let’s compute the market values of Eastnorth Manufacturing’s securities and their 
current market value weights and compare these fi gures to Eastnorth Manufacturing’s target 
capital structure. A security’s market value is found by multiplying its market price by the 
6
For insights into how to handle these more complex fi nancing structures, see McKinsey & Company Inc., Tim 
Koller, Marc Goedhart, and David Wessels, 
Valuation: Measuring and Managing the Value of Companies
, 4th ed. 
(Hoboken, NJ: Wiley, 2005), and Michael C. Ehrhardt, 
The Search for Value
(New York: Oxford University Press, 
2001), or most intermediate-level corporate fi nance textbooks.
7
For a good case study of estimating the cost of capital for fi rms in the food processing industry, see Samuel C. 
Weaver, “Using Value Line to Estimate the Cost of Capital and Industry Capital Structure,” 
Journal of Financial 
Education
,
 
Fall 2003, vol. 29, pp. 55–71.

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576
C H A PT E R 1 8 Capital Structure and The Cost of Capital
number of bonds or shares outstanding. The fi gures in the previous table give these market 
values and weights:
Security
Market Value