Question

Masterson, Inc., has 9 million shares of common stock outstanding. The current share price is $81, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $130 million, has a coupon rate of 6 percent, and sells for 92 percent of par. The second issue has a face value of $115 million, has a coupon rate of 5 percent, and sells for 103 percent of par. The first issue matures in 24 years, the second in 10 years. Both bonds make semiannual coupon payments.

a. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

b. What are the company’s capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

c. Which are more relevant, the book or market value weights?

Answer #1

a)

Book Value per share | Number of shares outstanding(in million) | Book Value(In million) | Book Value/Total | |

Equity | 7 | 9 | 63 | 0.2045 |

Debt | - | - | 245 | 0.7955 |

Total | 308 |

Capital structure of Equity = 0.2045

Capital structure of Debt= 0.7955

b)

Market value of debt:

Book Value | Selling at | Market Value = Book Value*Selling at what percentage | |

First Issue | 130 | 92% | 119.6 |

Second Issue | 115 | 103% | 118.45 |

Market Value per share | Number of shares outstanding | Book Value(In million) | Book Value/Total | |

Equity | 81 | 9 | 729 | 0.7538 |

Debt | - | - | 238.05 | 0.2462 |

Total | 967.05 |

Capital structure of Equity = 0.7538

Capital structure of Debt= 0.2462

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