CHAPTER 14 - 188
So, the total value of the company is:
V
= $56,000,000 + 135,000,000 = $191,000,000
And the book value weights of equity and debt are:
E/V
= $56,000,000 / $191,000,000 = .2932
D/V
= 1 –
E/V
= .7068
b.
The market value of equity is the share price times the number of shares, so:
MV
E
= 8,000,000($73) = $584,000,000
Using the relationship that the total market value of debt is the price quote times the par value
of the bond, we find the market value of debt is:
MV
D
= .97($85,000,000) + 1.08($50,000,000) = $136,450,000
This makes the total market value of the company:
V
= $584,000,000 + 136,450,000 = $720,450,000
And the market value weights of equity and debt are:
E/V
= $584,000,000 / $720,450,000 = .8106
D/V
= 1 –
E/V
= .1894
c.
The market value weights are more relevant.
13.
First, we will find the cost of equity for the company. The information provided allows us to solve
for the cost of equity using the dividend growth model, so:
R
E
= [$3.90(1.06) / $73] + .06
R
E
= .1166, or 11.66%
Next, we need to find the YTM on both bond issues. Doing so, we find:
P
1
= $970 = $35(PVIFA
R%,42
) + $1,000(PVIF
R
%,42
)
R
= 3.641%
YTM = 3.641% × 2 = 7.28%
P
2
= $1,080 = $40(PVIFA
R%,12
) + $1,000(PVIF
R%,12
)
R = 3.187%
YTM = 3.187% × 2 = 6.37%