Erna Corp. has 8 million shares of common stock outstanding. The current share p
ID: 2738699 • Letter: E
Question
Erna Corp. has 8 million shares of common stock outstanding. The current share price is $87, and the book value per share is $6. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a coupon of 10 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, has a coupon of 11 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 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))
Equity/Value ?
Debt/Value ?
b. What are Erna’s capital structure weights on a market value basis? (Round your answer to 4 decimal places. (e.g., 32.1616))
Equity/Value ?
Debt/Value ?
Explanation / Answer
TOTAL BOOK VALUE OF EQUITY
= 8000000 * $6
= $48000000
TOTAL BOOK VALUE OF BEBT
= $75000000 + $50000000
= $125000000
TOTAL BOOK VALUE OF CORP.
= $48000000 + $125000000
= $173000000
EQUITY WEIGHT
= $48000000 / $173000000
= 0.277457 OR 27.7457%
DEBT WEIGHT
= $125000000 / $173000000
= 0.722543 OR 72.2543
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B./
TOTAL MARKET VALUE OF EQUITY
= 8000000 * $87
= $696000000
TOTAL MARKET VALUE OF BEBT
= ($75000000 *97%) + ($50000000 * 105%)
= $72750000 + $52500000
= $125250000
TOTAL MARKET VALUE OF CORP.
= $696000000 + $125250000
= $821250000
EQUITY WEIGHT
= $696000000 / $821250000
= 0.847489 OR 84.7489%
DEBT WEIGHT
= $125250000 / $821250000
= 0.152511 OR 15.2511%
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