Question

Rooster, Inc., has 9 million shares of common stock outstanding. The current share price is $55, and the book value per share is $6. Rooster also has two bond issues outstanding that both originally sold at par. The first bond issue has a face value of $90 million, has an 8 percent coupon, and sells for 104 percent of par. The second issue has a face value of $50 million, has a 7.5 percent coupon, and sells for 106 percent of par. The first issue matures in 10 years, the second in 6 years.

a. What are Rooster’s capital structure weights on a book value basis?

b. What are Rooster’s capital structure weights on a market value basis?

Answer 1

No. of shares = 9 million

Current share price per share = $55

Book Value per Share = $6

First bond - face value $90 million, coupon rate 8%, Selling Price = $90 million * 104% = 93.6 million, Maturity = 10 years

Second Bond - Face value= $50 million, coupon Rate= 7.5%, Selling Price= 50 million* 106% = 53 million, Maturity = 6 years

a. Calculation of Capital Structure weights on a book value basis

Particulars	rate of return (A)	book value	proportion (B)	weights (A*B)
shares	8.16% (see note 1)	$54 million	0.2783	2.27
Bond 1	8%	$90 million	0.4639	3.71
Bond 2	7.5%	$50 million	0.2578	1.93
	Total	$194 million	1.0000	7.91

Note -1 Calculation of return on shares

Return on shares = (55-6)/6 = 8.16%  

b. Calculation of Rooster’s capital structure weights on a market value basis:

Particulars	rate of return (A)	Market value	proportion (B)	weights (A*B)
shares	8.16% (see note 1)	$495 million	0.7715	6.29
Bond 1	8%	$93.6 million	0.1459	1.17
Bond 2	7.5%	$53 million	0.0826	0.62
	Total	641.6 million	1.0000	8.08