Erna Corp. has 7 million shares of common stock outstanding. The current share p
ID: 2721517 • Letter: E
Question
Erna Corp. has 7 million shares of common stock outstanding. The current share price is S86, and the book value per share is $5. Ema Corp. also has two bond issues outstanding. The first bond issue has a face value of $70 million, has a coupon of 9 percent, and sells for 96 percent of par. The second issue has a face value of S45 million, has a coupon of 10 percent, and sells for 104 percent of par. The first issue matures in 24 years, the second in 6 years. 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 What are Ema's capital structure weights on a market value basis? (Round your answer to 4 decimal places, (e.g., 32.1616)) Equity/Value Debt/Value Which are more relevant, the book or market value weights? Market value Book valueExplanation / Answer
Solution
a) Calculation of book value weight
Capital Structure
Book Value
Weight
Common Stock (7,000,000*$5)
$35,000,000
0.2333
Bond Value:
First Bond
$70,000,000
Second Bond
$45,000,000
Total Bond Value
$115,000,000
0.7667
Total Value
$150,000,000
Equity / Value = 0.2333
Debt / Value = 0.7667
b) Calculation of market value weight
Capital Structure
Market Value
Weight
Common Stock (7,000,000*86)
$602,000,000
0.8408
Bond Value:
First Bond
$67,200,000
Second Bond
$46,800,000
Total Bond Value
$114,000,000
0.1592
Total Value
$716,000,000
Equity / Value = 0.8408
Debt / Value = 0.1592
c) Market Value weights are more relevant.
Capital Structure
Book Value
Weight
Common Stock (7,000,000*$5)
$35,000,000
0.2333
Bond Value:
First Bond
$70,000,000
Second Bond
$45,000,000
Total Bond Value
$115,000,000
0.7667
Total Value
$150,000,000
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