Question

Ten Pins Manufacturing has 9 million shares of common stock outstanding. The current share price is $81, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million and a coupon rate of 10 percent and sells for 96 percent of par. The second issue has a face value of $50 million and a coupon rate of 11 percent and sells for 104 percent of par. The first issue matures in 25 years, the second in 8 years. 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.)

Answer 1

Debt = 0.6436 and Equity = 0.3564

Step-by-step explanation:

For computing the weights, first we have to determine the book value of debt and equity which is shown below:

Book value of debt would be

= Face value of first bond + Face value of second bond

= $80 million + $50 million

= $130 million

And, the book value of equity would be

= Number of shares × book value per share

= 9 million shares × $8

= $72 million

Now the total firm value would be

= $130 million + $72 million

= $202 million

The weighted of Debt = (Debt ÷ total firm value)

= ($130 million ÷ $202 million)

= 0.6436

And, The weighted of equity = (Equity ÷ total firm value)

= ($72 million ÷ $202 million)

= 0.3564