Example / Answer 1) Calculate the total book value and total market value of the capital 2) Divide each component's book value and market value by their respective totals. Total Book Value =$375,000,000; Total Market Value =$426,315,000 Book Value Weights: Debt =$150m/$375m=40%; P/S=$45m/$375m=12%; C/S=$180m/$375m=48% Market Value Weights: Debt =$161.25m/$426.32m=38% P/S=$60m/$426.32=14% C/S=$205.07m/$426.32m=48% (Rounded to nearest whole number) He should use the market value weights as they represent a more current picture of the firm's capital structure. Practical Question (NPV) Saber Electronics provides specialty manufacturing services to defense contractors located in the Seattle, WA area. The initial outlay is $3 million and, management estimates that the firm might generate cash flows for years one through five equal to $500,000;$750,000; $1,500,000;$2,000,000; and \$2,000,000. Saber uses a 20% discount rate for projects of this type. Is this a good investment opportunity? Practical Questions (cont.) Compute PI of expected cash flows by discounting the cash flows from Year 1 to Year 6 at 10%