CH 12 Drill Question 1 Vedder, Inc., has 7.1 million shares of common stock outs
ID: 2718190 • Letter: C
Question
CH 12 Drill Question 1
Vedder, Inc., has 7.1 million shares of common stock outstanding. The current share price is $62.70, the book value per share is $5.70. Vedder also has two bond issues outstanding. The first bond issue has a face value of $71.7 million, a coupon rate of 7.2 percent, and sells for 89.5 percent of par. The second issue has a face value of $36.7 million, a coupon rate of 8.2 percent, and sells for 88.5 percent of par. The first issue matures in 22 years, the second in 14 years. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) What are the company's capital structure weights on a market value basis? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).) Which are more relevant, the book or market value weights?Explanation / Answer
The book value of Filer is the sum of the book value of equity and book value of debt:
The book value weights of equity and debt are:
The market value of equity is the market value per share times the number of shares outstanding, and the market value of debt is the face value of the firm’s bonds times the market value percent of par value:
The market value of Filer is the sum of the market value of equity and market value of debt:
The market value weights of equity and debt are:
The market value weights are more relevant. The firm’s book values represent historic costs whereas the firm’s market values represent the market’s expectations of future cash flows discounted back to the present. Since we are interested in future cash flows, we are interested in market values.