Question

20. The Company B has 6.6 million shares of common stock outstanding. The shares are currently selling at Rs.61.60. Book value of the share is Rs. 4.6. Company B also has two bonds issues outstanding. The first bond issue has a face value of 70.6 million. The coupon rate of 17.1% & sells for 95% of par.The second issue has a face value of 35.6 million & coupon rate of 7.1% & sell for 10.5% of par.The first issues matures in 21 years and second in 13 years.
Company B also Bank loan of Rs.80 million and the interest rate is 12%.
a) Find capital structure weights on book value basis.
b) What are the capital structure weights on market value basis? Which one is the best?

Answer 1

1. the book value of shares:

$6.6\times4.6=30.36$

the book value of bonds:

$170.6\times0.171=12.0726$

$\frac{12.0726}{(1+0.171)^21}+\frac{70.6}{(1+0.171)^21}=68.03+\frac{70.6}{27.52}=68.03+2.57=70.59=70.6$

$35.6\times0.171=2.5276$

$\frac{2.5276}{(1+0.071)^13}+\frac{35.6}{(1+0.071)^13}=21.01+\frac{35.6}{2.44}=21.01+14.59=35.6$

$70.6+35.6=106.2$

the book value of credit: 80

equity capital: 30.36

borrowed capital:$106.2+80=186.2$

Total capital:

$30.6+186.2=216.56$

14,02 %- equity capital

85,98% - borrowed capital

1. market value of shares:

$6.6\times61.60=406.56$

the market value of bonds:

$70.6\times0.95=67.07$

$67.07\times0.171=11.47$

$\frac{11.47}{(1+0.171)^21}+\frac{67.07}{(1+0.171)^21}=64.64+\frac{67.07}{27.52}=64.64+2.43=67.07$

$35.6\times0.105=3.738$

$3.738\times0.071=0.265$

$\frac{0.265}{(1+0.071)^13}+\frac{3.738}{(1+0.071)^13}=2.208+\frac{3.738}{2.448}=2.208+1.53=3.738$

the market value of loan:

$\frac{80\times 0.01}{(1- (1 + 0.01) -^ 12)} = \frac{0.8}{(1-1.01- ^12 )}=\frac{ 0.8}{(1-\frac{ 1}{ 1.1268})} =\frac{0.8}{0.1126} = 7.10$ , per month

$7.10\times12=85.26$, per year

Total capital:

$406.56+67.07+3.738+85.26=562.628$

72.26 %- equity capital

27.74% - borrowed capital

market value is the best