Erna Corp. has 9 million shares of common stock outstanding. The current share p

Question

Erna Corp. has 9 million shares of common stock outstanding. The current share price is $88, 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 $80 million, has a coupon of 5 percent, and sells for 98 percent of par. The second issue has a face value of $55 million, has a coupon of 6 percent, and sells for 106 percent of par. The first issue matures in 20 years, the second in 8 years. a. What are Erna's capital structure weights on a book value basis? (Round your answer to 4 decimal places, (e.q.. 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)) Which are more relevant, the book or market value weights?

Explanation / Answer

Market value Weights Common stock $                                    792,000,000 0.8528 9000000*88 Debt $                                    136,700,000 0.1472 80000000*98%+55000000*106% Total $                                    928,700,000 1.0000 Book value Weights Common stock $                                      63,000,000 0.3182 9000000*7 Debt $                                    135,000,000 0.6818 80000000+55000000 Total $                                    198,000,000 1.0000

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