Vedder, Inc., has 7.6 million shares of common stock outstanding. The current sh
ID: 2754336 • Letter: V
Question
Vedder, Inc., has 7.6 million shares of common stock outstanding. The current share price is $62.60, and the book value per share is $5.60. 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.
(a)
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).)
(b)
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).)
(c)
Vedder, Inc., has 7.6 million shares of common stock outstanding. The current share price is $62.60, and the book value per share is $5.60. 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.
Explanation / Answer
a)
What are the company’s capital structure weights on a book value basis?
The book value of equity is book value per share times the number of shares ,and the book value of debt is face value of the company's debt:-
BVe = 7,600,000*5.6 = $42,560,000
BVd = 71,600,000+35,600,000= $107,200,000
Total value of the company = $149,760,000
And the book value of debt and equity is:-
E/V = 42,560,000/149,760,000 = 0.284
D/V = 107,200,000/149,760,000 = 0.7158
b) What are the company’s capital structure weights on a market value basis?
Market value of Equity: 62.6m * 7,600,000 =475. 76 million
Market value of bond: 71.6*.9+36.6 * 0.89 = 64.44+32.574 = $97.014 million
Total value of debt: $97,104,000
Total MV of company = $572,774,000
Weight of Equity: 475.76 / 572.774 = 0.8306
Weight of bond : (1 - weight of bond ) = 0.1693
(c)
Which are more relevant, the book or market value weights?
When trying to gauge whether we should buy or sell a stock, using the book value in conjunction with the market value can be beneficial. Because true value of the company is determined by. When investors get scared, they will sometimes drive the price of the stock down below what it the numbers it represents in it’s financial statements. As market value may be driven by the market sentiments of the peoples. If the market value is substantially below the book value, this may represent an opportunity to buy.
(c)
Which are more relevant, the book or market value weights?
When trying to gauge whether we should buy or sell a stock, using the book value in conjunction with the market value can be beneficial. Because true value of the company is determined by. When investors get scared, they will sometimes drive the price of the stock down below what it the numbers it represents in it’s financial statements. As market value may be driven by the market sentiments of the peoples. If the market value is substantially below the book value, this may represent an opportunity to buy.
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