Erna Corp. has 4 million shares of common stock outstanding. The current share p

Question

Erna Corp. has 4 million shares of common stock outstanding. The current share price is $83, 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 $90 million, has a coupon of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, has a coupon of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years.

A. What are Erna’s capital structure weights on a book value basis?

Equity/Value=   

   Debt/Value=

B. What are Erna’s capital structure weights on a market value basis?

   Equity/Value=

   Debt/Value=

Erna Corp. has 4 million shares of common stock outstanding. The current share price is $83, 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 $90 million, has a coupon of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, has a coupon of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years.

Explanation / Answer

Book value of debt 1 = $90 million

Book value of debt 2 = $60 million

So total Book value of Debt = $90 + $60

                                              = $150 million

Hence, Book value of debt is $150 million.

Number of share outstanding = 4 million

Book value of stock = $8

Book value of equity = $8 × 4 million

                                   = $32 million

Hence, book value of equity is $32 million.

Market value of debt 1 is 98% of par and market value of debt 2 is 106% of par.

So market value of debt = ($90 × 98%) + ($60 × 106%)

                                       = $88.20 × $63.60

                                       = $151.80 million

Hence, Market value of debt is $151.80 million.

Number of share outstanding = 4 million

Market value of stock = $83

Market value of equity = $83 × 3 million

                                   = $332 million

Hence, Market value of equity is $332 million.

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