Vedder Inc has 67 million shares of common stock outstanding

Vedder, Inc., has 6.7 million shares of common stock outstanding. The current share price is $61.70, and the book value per share is $4.70. Vedder also has two bond issues outstanding. The first bond issue has a face value of $70.7 million, a coupon rate of 7.2 percent, and sells for 94.5 percent of par. The second issue has a face value of $35.7 million, a coupon rate of 7.2 percent, and sells for 93.5 percent of par. The first issue matures in 22 years, the second in 14 years. The most recent dividend was $3.20 and the dividend growth rate is 8 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 30 percent.

What is the company’s equity weight?

Solution

Company\'s equity weight can be calculated on the basis of book value or market vaue of capital. However, market value weights are considered more realistic while calculating WACC. Since the basis is not specified in the question both the weights are being calculated.

On basis of Book Value:

Equity = 6700000 * $4.70 = $31490000

Debt = $70700000 + $35700000 = $106400000

Total = $137890000

Weight of Equity = 31490000 / 137890000 * 100 = 22.84%

On basis of market value:

Equity = 6700000 * $61.70 = $413390000

Debt = $70700000*94.5% + $35700000*93.5% = $66811500 + $33379500 = $100191000

Total = $513581000

Weight of Equity = 413390000 / 513581000 * 100 = 80.49%