Question

Hero Manufacturing has 6 million shares of common stock outstanding. The current share price is $85 and the book value per share is $8. The company also has two bond issues outstanding, both with semiannual coupons. The first bond issue has a face value $65 million and a coupon of 8 percent and sells for 95 percent of par. The second issue has a face value of $40 million and a coupon of 9 percent and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 years. a. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) b. What are the company's capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) c. Which are more relevant? Market value weights Book value weights

Answer 1

Answer:

1. Book value of equity

6 million x 8 = 48million

Book value of debt = 65 + 40 = 105 million

Total value = 105 + 48 = 153 million

Weight of equity = 48/153 = 0.3137

Weight of debt = 105/153 = 0.6863

2. Market value

= 6 million x 85 = 510million

= Market value of debt = (65m * 0.95) + (40m * 1.08)

= 61.75m + 43.2m

= 104.95million

Total value = 104.95 + 510 = 614.95million

Weight of equity on market value = 510/614.95 = 0.8293

Weight of debt on market value = 104.95/614.95 = 0.1707

3. Market value of weights are more relevant