Vedder. Inc.. has 7.7 million shares of common stock outstanding. The current sh
ID: 2722379 • Letter: V
Question
Vedder. Inc.. has 7.7 million shares of common stock outstanding. The current share price is $62.70. and the book value per share is $5.70. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.7 million, a coupon rate of 7.2 percent, and sells for 89.5 percent of par. The second issue has a face value of $36.7 million, a coupon rate of 8.2 percent, and sells for 88.5 percent of par. The first issue matures in 22 years, the second in 14 years. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) Book value weight of equity Book value weight of debt What are the company's capital structure weights on a market value basis? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) Market value weight of equity Market value weight of debt Which are more relevant, the book or market value weights?Explanation / Answer
What is company capital structure on the book values basis
Let us first calculate the book value of equity
Book value of equity = equity shares outstanding x face value of share
Book value of equity = 7.7 x $5.70
Book value of equity = $ 43.89 million
The face value of debt is the book value of debt
Book value of debt = $71.7 + $ 36.7
Book value of debt = $108.4 million
To calculate the weights we will
calculate the total value of the company
weight of equity will be value of equity divided by total value
weight of debt will be value of debt divided by total value
the total value of debt is = $43.89 +$108.4 = $152.29 million
weight of equity = 43.89 /152.29 = 0.2882
weight of debt = 1 – weight of equity = 1- 0.2882 = 0.7118
b)
Let us first calculate the market value of equity
Market value of equity = equity shares outstanding x market value of share
Market value of equity = 7.7 x $62.70
Market value of equity = $ 482.79 million
The market value of debt is the book value of debt x current selling value
Market value of debt = ($71.7 x 0.895) + ($ 36.7 x 0.885)
Market value of debt = $96.651 million
To calculate the weights we will
calculate the total value of the company
weight of equity will be value of equity divided by total value
weight of debt will be value of debt divided by total value
the total value of debt is = $482.79 +$96.651 = $579.441 million
Weight of equity = 482.79/579.441 = 0.8332
Weight of debt = 1 – weight of equity = 1- 0.8332 = 0.1668
c) the market weights are relevant
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