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 $70, and the book value per share is $5. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $60 million, has a coupon of 5 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, has a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 years. a. What are Erna’s capital structure weights on a book value basis b. What are Erna’s capital structure weights on a market value basis?

Explanation / Answer

a. Book Values
Common stock = 4 x 5 = $20 million
First Bond = $60 million
Second Bond = $40 million

Weights:
Common stock = 20/(20+60+40) = 16.67%
First Bond = 60/(20+60+40) = 50%
Second Bond = 40/(20+60+40) = 33.33%

b. Market values
Common stock = 4 x 70 = $280 million
First Bond = 60 x 0.95 = $57 million
Second Bond = 40 x 1.04 = $41.6 million

Weights:
Common stock = 280/(280+57+41.6) = 73.96%
First Bond = 57/(280+57+41.6) = 15.06%
Second Bond = 41.6/(280+57+41.6) = 10.98%

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