Question

Masterson, Inc., has 9 million shares of common stock outstanding. The current share price is $69, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $70 million, has a coupon rate of 6 percent, and sells for 94 percent of par. The second issue has a face value of $55 million, has a coupon rate of 5 percent, and sells for 106 percent of par. The first issue matures in 24 years, the second in 9 years. Both bonds make semiannual coupon payments. a. What are the company's capital structure weights on a book value basis? b. what are the companys structure weights on a market value basis

c. Which are more relevant, the book or market value weights?

Answer 1

(a)	Equity / Value	0.3655
	Debt / Value	0.6345
(b)	Equity / Value	0.8334
	Debt / Value	0.1666

Company's capital structure weights on a book value basis

Book Value of Common Stock = $72,000,000 [9,000,000 shares x $8.00 per share]

Book Value of Debt = $125,000,000 [$70,000,000 + $55,000,000]

Total Book Value = $197,000,000

Capital structure weights of Common Stock = 0.3655 [$72,000,000 / $197,000,000]

Capital structure weights of Debt = 0.6345 [$125,000,000 / $197,000,000]

(b)-Company’s capital structure weights on a market value basis

Market Value of Common Stock = $621,000,000[9,000,000 shares x $69 per share]

Market Value of Debt = $124,100,000 [($70,000,000 x 94%) + ($55,000,000 x 106%)]

Total Market Value = $745,100,000

Capital structure weights of Common Stock = 0.8334 [$621,000,000 / $745,100,000]

Capital structure weights of Debt = 0.1666 [$124,100,000 / $745,100,000]

(c)-“The market value weight” is more relevant for calculating the company’s capital structure weights.