Erna Corp. has 8 million shares of common stock outstanding. The current share p

Question

Erna Corp. has 8 million shares of common stock outstanding. The current share price is $80, and the book value per share is $7. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a coupon of 9 percent, and sells for 95 percent of par. The second issue has a face value of $45 million, has a coupon of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 7 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 8 million shares of common stock outstanding. The current share price is $80, and the book value per share is $7. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a coupon of 9 percent, and sells for 95 percent of par. The second issue has a face value of $45 million, has a coupon of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 7 years.

Explanation / Answer

Book value of debt 1 = $75 million

Book value of debt = $45 million

So total Book value of Debt = $75 + $45

                                              = $120 million

Hence, Book value of debt is $120 million.

Number of share outstanding = 8 million

Book value of stock = $7

Book value of equity = $7 × 8 million

                                   = $56 million

Hence, book value of equity is $56 million.

Market value of debt 1 is 95% of par and market value of debt 2 is 108% of par.

So market value of debt = ($75 × 95%) + ($45 × 108%)

                                       = $71.25 × $48.60

                                       = $119.85 million

Hence, Market value of debt is $119.82 million.

Number of share outstanding = 8 million

Market value of stock = $80

Market value of equity = $80 × 8 million

                                   = $640 million

Hence, Market value of equity is $640 million.

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