Ema Corp. has 7 million shares of common stock outstanding. The current share pr

Question

Ema Corp. has 7 million shares of common stock outstanding. The current share price is S86, and the book value per share is S5. 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 $45 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. a. What are Erna's capital structure weights on a book value basis? (Round your answer to 4 decimal places, (e.g., 32.1616))

Explanation / Answer

a. Book Value of equity = 5 * 7,000,000 = 35,000,000

Book value of debt = 70,000,000 + 45,000,000 = 115,000,000

Total value = 35,000,000 + 115,000,000 = 150,000,000

Equity/Value = 35/150 = 0.2333

Debt /Value = 115/150 = 0.7667

b. Market Value of equity = 86 * 7,000,000 = 602,000,000

Market Value of debt = 70,000,000 * 0.96 + 45,000,000 *1.04 = 114,000,000

Total value = 602,000,000 + 114,000,000 = 716,000,000

Equity/value = 602/716 = 0.8408

Debt/value = 114/716 =0.1592

c. Market Value

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