A company has 8 million shares of stock outstanding. The current share price is

Question

A company has 8 million shares of stock outstanding. The current share price is $73, and book value per share is $7. 2 bond issues are also outstanding. The first bond has face value of $85 million with a 7% coupon, and sells for 97% of par. The second bond has a face value of $50 million with an 8% coupon, and sells for 108% of par. The first matures in 21years, the second in 6 years. - What are the capital structure weights on a book value basis? - What are the capital struxture weights on a market value basis? -Which are more relevant & why?

Explanation / Answer

Book value basis: equity = 7*8=56 million, debt=85+50=135million, equity weight=56/(56+135)=0.2932 ; debt weight=135/(56+135)=0.7068 ;Market value basis: equity =8*73=584million, debt weight=97%*85+108%*50=136.45million, equity weight=584/(584+136.45)= 0.8106, debt weight=136.45/(584+136.45)=0.1894; From the share holders

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