Company X has 4 million shares of common stock outstanding. The current share pr

Question

Company X has 4 million shares of common stock outstanding. The current share price is $76, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value $90 million, has a coupon of 5 percent, and sells for 94 percent of par. The second issue has a face value of $70 million, has a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 3 years.

a. What are Company X'x capital structure weights on a book value basis?

b. What areCompany X's capital structure weights on a market value basis?

c. Which are more relevant and why? (Show work)

Explanation / Answer

a. Book value of equity =4*5 = 20 million

Book value of debt = $90 +$70 = 160 million

weight of debt = 160/(160+20) = 88.89%

weight of equity= 20/(160+20) = 11.11%

b. Market value of equity =4*76 = 304 million

Book value of debt = $90*94% +$70*104% = 157.4 million

weight of debt = 157.4/(157.4+304) = 34.11%

weight of equity= 304/(157.4+304)= 65.89%

c. capital structure weights on a market value basis is more relevant as it reflects the current market value and is used in the calculation of cost of capital of the compnay

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.