Erna Corp. has 10 million shares of common stock outstanding. The current share

Question

Erna Corp. has 10 million shares of common stock outstanding. The current share price is $82, and the book value per share is $5. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $85 million, has a coupon of 5 percent, and sells for 97 percent of par. The second issue has a face value of $55 million, has a coupon of 6 percent, and sells for 105 percent of par. The first issue matures in 20 years, the second in 9 years.

What are Erna’s capital structure weights on a book value basis? (Round your answer to 4 decimal places. (e.g., 32.1616))

What are Erna’s capital structure weights on a market value basis? (Round your answer to 4 decimal places. (e.g., 32.1616))

Erna Corp. has 10 million shares of common stock outstanding. The current share price is $82, and the book value per share is $5. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $85 million, has a coupon of 5 percent, and sells for 97 percent of par. The second issue has a face value of $55 million, has a coupon of 6 percent, and sells for 105 percent of par. The first issue matures in 20 years, the second in 9 years.

Explanation / Answer

A) Book value of equity = no. of shares * book value per share = 10*5 = 50m

Book value of Debt = Face value of bond 1 + Face value of bond 2 = 85 + 55 = 140m

Total value = Book value of equity + Book value of Debt = 50 + 140 = 190m

Equity/Value = 50/190 = 0.2632

Debt/Value = 0.7368

B)

Market value of equity = no. of shares * Market value per share = 10*82 = 820m

Market value of Debt = Face value of bond 1* percent of par + Face value of bond 2percent of par = 85*.97 + 55*1.05 = 140.2

Total value = Book value of equity + Book value of Debt = 820 + 140.2 = 960.2m

Equity/Value = 820/960.2 = 0.8540

Debt/Value = 140.2/960.2 = 0.1460

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