Question

Hero Manufacturing has 8 million shares of common stock outstanding. The current share price is $87 and the book value per share is $6. The company also has two bond issues outstanding, both with semiannual coupons. The first bond issue has a face value $75 million and a coupon of 10 percent and sells for 97 percent of par. The second issue has a face value of $50 million and a coupon of 11 percent and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 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.)

Answer 1

A. The book value of equity is the book value per share times the number of shares outstanding, and the book value of debt is the face value of the firm’s bonds:

BV_E = 6*8000000 = 48000000

BV_D = 75000000+50000000 = 125000000

The book value of Filer is the sum of the book value of equity and book value of debt:

VF_iller = 48000000+125000000= 173000000

The book value weights of equity and debt are:

E/V = W_E = BVe/V = 48000000/173000000 = 0.2774

D/V = WD= BV_D/V = 125000000/173000000 = 0.7225

B.       The market value of equity is the market value per share times the number of shares outstanding, and the market

          value of debt is the face value of the firm’s bonds times the market value percent of par value:

MV_E = 87*8000000 = 696000000

MV_D = 75000000*0.97+50000000*1.05 = 72750000+52500000 = 125250000

The market value of Filer is the sum of the market value of equity and market value of debt

VF_iller = 696000000+125250000 = 821250000

The market value weights of equity and debt are:

E/V = W_E = MVe/V = 696000000/821250000 = 0.8474

D/V = WD= MV_D/V = 125250000/821250000 = 0.1525