Vedder, Inc., has 7.6 million shares of common stock outstanding. The current sh
ID: 2753062 • Letter: V
Question
Vedder, Inc., has 7.6 million shares of common stock outstanding. The current share price is S62.60, and the book value per share is S5.60. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.6 million, a coupon rate of 7.1 percent, and sells for 90 percent of par. The second issue has a face value of $36.6 million, a coupon rate of 8.1 percent, and sells for 89 percent of par. The first issue matures in 21 years, the second in 13 years. Required: 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
Solution.
Calculation of weight at book value.
Calculation of book value weight of equity = 7.6 x $5.6 = $42.56
Calculation of book value weight of Debt = $71.6 + $36.6 = $108.2
Total capital = $42.56 + $108.2 = $150.76
Weight of equity = $42.56 / $150.76 = 28.23%
Weight of debt = $108.2 / $150.76 = 71.77%
B. Calculation of weight at Market value.
alculation of book value wait of equity = 7.6 x $62.60 = $475.76
Calculation of book value wait of Debt = $64.44 + $32.57 = $97.01
Total capital =$475.76 + $97.01 = $572.77
Weight of equity = $475.76 / $572.77 = 83.06%
Weight of debt = $97.01 / $572.77 = 16.93%
C. Market valua weight is more relevant for company.Because in the capital structure equity weight is 83.06%.
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