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Hero Manufacturing has 8 million shares of common stock outstanding
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.)
c.Which are more relevant?
- Market value weights
- Book value weights
Expert Solution
a. Computation of Company's Capital Structure Weight of Equity and Debt on Book Value Basis:
Book Value of Equity = 8,000,000 Shares * $6.00 = $48,0000,000
Book Value of Bond 1 = $75,000,000
Book Value of Bond 2 = $50,000,000
Total Book Value of Bond = $75,000,000+$50,000,000 = $125,000,000
Total of Book Value = $48,000,000+ $125,000,000 = $173,000,000
Weight of Equity = $48,000,000/$173,000,000 = 0.2775
Weight of Bond = $125,000,000/$173,000,000 = 0.7225
b.Computation of Company's Capital Structure weight of equity and Debt on a Market value basis:
Book Value of Equity = 8,000,000 Shares * $87.00 = $696,0000,000
Book Value of Bond 1 = $75,000,000*97% = $72,750,000
Book Value of Bond 2 = $50,000,000*105% = $52,500,000
Total Book Value of Bond = $72,750,000+$52,500,000 = $125,250,000
Total of Book Value = $696,000,000+ $125,250,000 = $821,250,000
Weight of Equity = $696,000,000/$821,250,000 = 0,8475
Weight of Bond = $125,250,000/$821,250,000 = 0.1525
c.Market value weights are always more relevant.
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