Was just looking at exam question… They worked out the capital structure by using the current firms equity ie market price of shares times shares outstanding. and then having been told its structure target is 40% finance, 60% equity they worked out the debt portion. I dont get it, I thought its debt amount would be determine doff the book value of equity not off the market value? To me the market value is inconsequential, as its not going to absorb losses answers anyone??
AFAIK, cost of debt is determined by its market rate because it’s posted to the company’s account at the time of issuance.
I realise that But when you talk about a firms capital structre it is actual what the capital is mad eup of on the balance sheet right. the percentage split. im not talking about the cost. You wouldnt actually say for example the debt to equity ration based on market values would you?
If you are a PE or a mutual fund that’s interested in a company, do you pay the price per share based on the market price or it’s book price? Maddane, you test for level 1 or 2?
ok good point. I am level 2. Looking at it from that perspective I get it. But this was more related to looking at the firm internally. Dunno why but this one was just geting to me
ok i remember this type of question when i took L2. i used book value intuitively and also my understanding of schweser. but i think the correct asnwer was to use MV. either that or most people used MV, and few used BV. in the end i was convinecd that you had to use BV but never got the proof. this is a good question to resolve.