Erna Corp. has 6 million shares of common stock outstanding. The current share p

Question

Erna Corp. has 6 million shares of common stock outstanding. The current share price is $89, 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 $85 million, has a coupon of 6 percent, and sells for 96 percent of par. The second issue has a face value of $60 million, has a coupon of 7 percent, and sells for 109 percent of par. The first issue matures in 21 years, the second in 9 years.

a. What are Ernas 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 Ernas 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

Explanation / Answer

a. The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company

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