Question

Masterson, Inc., has 6 million shares of common stock outstanding. The current share price is $78, and the book value per share is $9. The company also has two bond issues outstanding. The first bond issue has a face value of $115 million, has a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $100 million, has a coupon rate of 6 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 8 years. Both bonds make semiannual coupon payments. a. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) b. What are the company's capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) c. Which are more relevant, the book or market value weights? Equity/Value Debt/Value Equity/Value Debt/Value c. More relevant 0.2007 0.7993 0.6883 0.3117

Answer 1

Book value weight amount [millions (amount/total) Particulars $54.00 Weight of equity on book value basis common stock 0.2007 0.2007 $115.00 first issue 0.4275 Weight of debt on book value basis = 0.7993 $100.00 second issue 0.3717 $269.00 Total Book value weight amount [millions ](amount/total) Market value Particulars $468.00 Weight of equity on market value basis common stock 0.6883 0.6883 $106.95 first issue Weight of debt on market value basis = 0.1573 0.3117 $105.00 $679.95 second issue 0.1544 Total market value c) market value