Vedder inc, has 5 million shares of common stock outstanding. The current share
ID: 2707358 • Letter: V
Question
Vedder inc, has 5 million shares of common stock outstanding. The current share price is $73, and the book value per share is $9. Vedder also has two bond issues outstanding. The first bond issue has a face value of $60 million, a coupon rate of 7 percent, and sells for 98 percent of par. The second issue has a face value of $40 million, a ccoupon rate of 6.5 percent, and sells for 97 percent of par. The first issue matures in 20 years, the second in 12 years.
a. What are the company's capital structure weights on a book value basis?
b. What are the company's capital structure weights on market value basis?
c. Which are more relevant, the book or market value weights?
Explanation / Answer
a)
Book value of common stock = 5,000,000 * 9 = 45,000,000
Book value of 1st bond = 60,000,000
Book value of 2nd bond = 40,000,000
Total book value of bonds = 100,000,000
Total book value of cpital structure = 100,000,000 + 45,000,000 = 145,000,000
Weight of common stock = 45,000,000 / 145,000,000 = 0.3103
weight of bond = 100,000,000 / 145,000,000 = 0.6897
b)
Market value of common shares = 5,000,000 * 73 = 365,000,000
Market value of bond 1 = 60,000,000 * 0.98 = 58,800,000
Market value of bond 2 = 40,000,000 * 0.97 = 38,800,000
Total market value of bonds = 58,800,000 + 38,800,000 = 97,600,000
Total market value of capital structure = 365,000,000 + 97,600,000 = 462,600,000
Weight of common shares = 365,000,000 / 462,600,000 = 0.7890
Weight of bond = 97,600,000 / 462,600,000 = 0.211
c)
Market value weihts are more relevant.
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