Question

- Cost of Capital Saved Masterson, Inc., has 41 million shares of common stock outstanding. The current share price is $84, and the book value per share is $11. The company also has two bond issues outstanding. The first bond issue has a face value of $70 million, has a coupon rate of 5.1 percent, and sells for 98 percent of par. The second issue has a face value of $50 million, has a coupon rate of 5.60 percent, and sells for 108 percent of par. The first issue matures in 20 years, the second in 12 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.) c. Which are more relevant, the book or market value weights? a. Weight of equity Weight of debt b. Weight of equity Weight of debt Mero rolovat < Prev 2 of 10 Next >

Answer 1

(C) Book value weights are based on the financial records of the company or we can say the position as per the balance sheet of the company While market value weights basically considers the market value in the market .Market value weights also considers the future prospects of the company during valuation.

Mastuson Inc - (a Book value of Equity = Number of shores outstanding to the book value = 4.1 million x 11 =$ 45.1 million Book Value of debt = face value of Bond 1 g face value of bend 2 = 70 of 50 = $ 120 million Total Value = 45.1 + 120 = $165.1 million weight of equity = 45.1 = 0.2732 weight of debt = 120 = 0.7268 6 market value of Equity = 84x4.1 = $ 344.4 million market value of debt = mkt Value of band 1 t market value of bond g = 0.98 x 70 + 1:08 x 50=$ 122.6 millier, I Total Value = 344.4+ 122.6=$467 million 69' 344.4 = 0.7375 weight of Equity = 344.4 weight of dent = 122.6 = 0.2625 467

Generally market value is greater than book value and it it is not then it means people losing confidence on that instrument.

Hence,Generally market value weights are more used in comparison to book value weights.

Hankins Inc

a Calculation of W ale for project WACC = We x ke + w x kd given giun that deft = 0.4 dhe Equity - + 0.4 1+0.4 It debt = Equity Counter & ceft = 1.4 1: 47 Hence, we = 1 1 4 7 W, = 1 - 4 4 = 8.4 Hence, WACC = 1 / 4 x 10.8t o 4 x 3.2 = 8.63 % Hence, discount rate for prefect = W ACC + Adjustment factor - 8.63+ g = 10.63 %