Vedder, Inc., has 7.6 million shares of common stock outstanding. The current sh
ID: 2763266 • 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).)
Required:(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).)
Explanation / Answer
Solution.
The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company’s debt,
so: Equity = 7,600,000($5.6) = $42,520,000
Debt = $71,600,000 + 36,600,000 = $108,200,000
So, the total book value of the company is:
Book value = $42,520,000 + $108,200,000 = $150,720,000
And the book value weights of equity and debt are: Equity / Value
=$42,520,000 / $150,720,000 = .2821
Debt / Value = 1 – Equity / Value = .7178
b. The market value of equity is the share price times the number of shares,
so: S = 7,600,000($62.60) = $475,760,000
Using the relationship that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt is:
B = $71,600,000 (.90 ) + 36,600,000 (.89 ) = 64,440,000 + 32,574,000 = 97,014,000
This makes the total market value of the company:
V =$475,760,000 + 97,014,000 = $572,774,000
And the market value weights of equity and debt are:
S / V =$475,760,000 / $572,774,000 = .8306
B / V = 1 – E / V = .1693
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