Answer:
a. The company's capital structure weights on a book value basis is that the Equity/Value is 0.1584 and the Debt/Value is 0.8416
b. tTe company's capital structure weights on a market value basis is that the Equity/Value is 0.7257 and the Debt/Value is 0.2743
Explanation:
a. According to the given data we have the following:
Book Value of first bond = $135 million
Book Value of second bond = $120 million
Book Value of shares = 8*6 = 48
Therefore, in order to calculate the company's capital structure weights on a book value basis we would have to make the following calculations:
Weight of equity = 48/($135+$120+48) = 0.1584
Weight of debt = ($135+$120)/($135+$120+48) = 0.8416
b. In order to calculate the companyâs capital structure weights on a market value basis, we would have to calculate first the Market Value of first bond and the Book Value of second bond as follows
Market Value of first bond = $135*93% = $125.55 millions
Book Value of second bond = $120* 102% = $122.4 millions
Market Value of shares = 8*82 = 656
Therefore, Weight of equity = 656/(656 +125.55 +122.4) = 0.7257
Weight of debt = (125.55+122.4)/(656 +125.55 +122.4)) = 0.2743
