Finding the Target Capital Structure. Fama’s Llamas has a WACC of 8.65 percent.

Finding the Target Capital Structure. Fama’s Llamas has a WACC of 8.65 percent. The company’s cost of equity is 11 percent, and its cost of debt is 6 percent. The tax rate is 35 percent. What is Fama’s target debt-equity ratio?Book Value versus Market Value. Vedder, Inc., has 5 million shares of common stock outstanding. The current share price is $73, and the book value per share is $9. Vedder also has two bond issues outstanding. The first bond issue has a face value of $60 million, a coupon rate of 7 percent, and sells for 98 percent of par. The second issue has a face value of $40 million, a coupon rate of 6.5 percent, and sells for 97 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?b.What are the company’s capital structure weights on a market value basis?c.Which are more relevant, the book or market value weights? Why?

 

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