Question

Erna Corp. has 6 million shares of common stock outstanding. The current share price is $85, and the book value per share is $8. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $65 million, has a coupon of 8 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, has a coupon of 9 percent, and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 years. a. What are Erna’s capital structure weights on a book value basis? (Round your answer to 4 decimal places. (e.g., 32.1616)) Equity/Value Debt/Value b. What are Erna’s capital structure weights on a market value basis? (Round your answer to 4 decimal places. (e.g., 32.1616)) Equity/Value Debt/Value c. Which are more relevant, the book or market value weights?

Market value

Book value

Answer 1

Book value weight amount [millions ](amount/total) Particulars $48.00 Weight of equity on book value basis = Weight of debt on book value basis = 0.3137 common stock 0.3137 $65.00 first issue 0.6863 0.4248 $40.00 $153.00 second issue 0.2614 Total Book value Market value weight amount [millions ](amount/total) Particulars $510.00 Weight of equity on market value basis Weight of debt on market value basis = common stock 0.8293 0.8293 $61.75 first issue 0.1004 0.1707 $43.20 second issue 0.0702 $614.95 Total market value market value c)