17. Holden\'s manufacturing has 9 million shares of common stock outstanding. Th

Question

17. Holden's manufacturing has 9 million shares of common stock outstanding. The current share price is $81, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, a coupon of 10%, and sells for 96% of par The second issue has a face value of $50 million, a coupon of 11%, and seeks for 104% of par. The first issue matures in 25 years, the second in 8 years. A. What are the company's capital structure weights on a book value basis (Do not round intermediate calculations and enter your answer as percent rounded to 2 decimal places) Equity value Debt/value B. What are the company's capital structure weights on a market value basis (Do not round intermediate calculations and enter your answer as percent rounded to 2 decimal places) Equity Walue Debt Nalue C. Which are more relevant Market value weights or Book values weights

Explanation / Answer

Answer

The book value of equity is the book value per share times the number of shares outstanding, and the book value of debt is the face value of the firm’s bonds:

BVe = $8PerShare*9,000,000 = $72,000,000

BVd = $80,000,000+ $50,000,000 = $130,000,000

The book value of the company is the sum of the book value of equity and book value of debt:

VCompany = $72,000,000+$130,000,000

VCOMPANY = $202,000,000

The book value weights of equity and debt are:

E/V = We= BVe/V = 72,000,000/202,000,000 = 0.356435644

E/V =Wd = BVd/V = 130,000,000/202,000,000 = 0.643564356

The market value of equity is the market value per share times the number of shares outstanding, and the market value of debt is the face value of the firm’s bonds times the market value percent of par value:

MVe = 81*9,000,000 = $729,000,000

MVd = 80,000,000*0.96+ 50,000,000*1.04 = 12,880,000

The market value of the company is the sum of the market value of equity and market value of debt:

Vcompany = 729,000,000+12,880,000 = 857,800,000

The market value weights of equity and debt are:

E/V =We = MVe/V = 729,000,000/857,800,000 = 0.85

E/V =Wd =MVd/V = 128,800,000/857,800,000 = 0.15

The market value weights are more relevant. The firm’s book values represent historic costs whereas the firm’s market values represent the market’s expectations of future cash flows discounted back to the present. Since we are interested in future cash flows, we are interested in market values.

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