Question

Ten Pins Manufacturing has 9 million shares of common stock outstanding. The current share price is $75, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $85 million and a coupon rate of 10 percent and sells for 96 percent of par. The second issue has a face value of $65 million and a coupon rate of 11 percent and sells for 109 percent of par. The first issue matures in 25 years, the second in 9 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., 32.1616.)

Equity/Value
Debt/Value

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., 32.1616.)

Equity/Value
Debt/Value

Answer 1

a) Book value of equity = $6 x 9,000,000 = $54,000,000

Book value of debt = $85,000,000 + $65,000,000 = 150,000,000

Total Capital = 204,000,000

Weight of equity = 54,000,000/ 204,000,000 = 0.2647

Weight of debt = 1 - Weight of equity = 1 - 0.2647 = 0.7353

b) Market Value of Equity = $75 x 9,000,000 = 675,000,000

Market Value of debt = 85,000,000 x 96% + 65,000,000 x 109% = 152,450,000

Total Market Value = 827,450,000

Weight of equity = 675,000,000/ 827,450,000 = 0.8158

Weight of debt = 1 - 0.8158 = 0.1842