Question

Hero Manufacturing has 5 million shares of common stock outstanding. The current share price is $77 and the book value per share is $8. The company also has two bond issues outstanding, both with semiannual coupons. The first bond issue has a face value $60 million and a coupon of 6 percent and sells for 97 percent of par. The second issue has a face value of $30 million and a coupon of 7 percent and sells for 105 percent of par. The first issue matures in 21 years, the second in 4 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. Total Book Value of equity = Number of Shares* Book Value Per Share = 5,000,000*8 = 40,000,000 or 40 million
Total Book Value of Debt = Face Value of Bond 1 + Face Value of Bond 2 = 60 + 30 = 90 million
Total value = 40 + 90 = 130
Weight of Equity = 40/130 = 0.3077
Weight of Debt = 90/130 = 0.6923

b. Total Market Value of equity = Number of Shares* Share Price = 5,000,000*77 = 385,000,000 or 385 million
Total Market Value of Debt =Market Value of Bond 1 + Market Value of Bond 2 = 60*97% + 30*105% = 89.70 million
Total value = 385 + 89.70 = 474.70
Weight of Equity = 385/474.70 = 0.8110
Weight of Debt = 89.70/474.70 = 0.1890

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