Question

Vedder, Inc., has 5 million shares of common stock outstanding. The current share price is $73, and the book value per share is $9. Vedder also has two bond issues outstanding. The first bond issue has a face value of $60 million, a coupon rate of 7 percent, and sells for 98 percent of par. The second issue has a face value of $40 million, a coupon rate of 6.5 percent, and sells for 97 percent of par. The first issue matures in 20 years, the second in 12 years. 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).) Book value weight of equity Book value weight of debt (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).) Market value weight of equity Market value weight of debt

Answer 1

Answer a.

Debt:

Bond 1:

Book Value of Bond 1 = $60,000,000

Bond 2:

Book Value of Bond 2 = $40,000,000

Book Value of Debt = Book Value of Bond 1 + Book Value of Bond 2
Book Value of Debt = $60,000,000 + $40,000,000
Book Value of Debt = $100,000,000

Equity:

Shares Outstanding = 5,000,000
Book Value per share = $9.00

Book Value of Equity = Shares Outstanding * Book Value per share
Book Value of Equity = 5,000,000 * $9.00
Book Value of Equity = $45,000,000

Book Value of Firm = Book Value of Debt + Book Value of Equity
Book Value of Firm = $100,000,000 + $45,000,000
Book Value of Firm = $145,000,000

Weight of Debt = Book Value of Debt / Book Value of Firm
Weight of Debt = $100,000,000 / $145,000,000
Weight of Debt = 0.6897

Weight of Equity = Book Value of Equity / Book Value of Firm
Weight of Equity = $45,000,000 / $145,000,000
Weight of Equity = 0.3103

Answer b.

Debt:

Bond 1:

Book Value of Bond 1 = $60,000,000

Market Value of Bond 1 = 98% * Book Value of Bond 1
Market Value of Bond 1 = 98% * $60,000,000
Market Value of Bond 1 = $58,800,000

Bond 2:

Book Value of Bond 2 = $40,000,000

Market Value of Bond 2 = 97% * Book Value of Bond 1
Market Value of Bond 2 = 97% * $40,000,000
Market Value of Bond 2 = $38,800,000

Market Value of Debt = Market Value of Bond 1 + Market Value of Bond 2
Market Value of Debt = $58,800,000 + $38,800,000
Market Value of Debt = $97,600,000

Equity:

Shares Outstanding = 5,000,000
Market Value per share = $73.00

Market Value of Equity = Shares Outstanding * Market Value per share
Market Value of Equity = 5,000,000 * $73.00
Market Value of Equity = $365,000,000

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $97,600,000 + $365,000,000
Market Value of Firm = $462,600,000

Weight of Debt = Market Value of Debt / Market Value of Firm
Weight of Debt = $97,600,000 / $462,600,000
Weight of Debt = 0.2110

Weight of Equity = Market Value of Equity / Market Value of Firm
Weight of Equity = $365,000,000 / $462,600,000
Weight of Equity = 0.7890