Question

Masterson, Inc., has 6 million shares of common stock outstanding. The current share price is $84, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $145 million, has a coupon rate of 5 percent, and sells for 95 percent of par. The second issue has a face value of $130 million, has a coupon rate of 4 percent, and sells for 107 percent of par. The first issue matures in 24 years, the second in 9 years. Both bonds make semiannual coupon payments.

What are the company's capital structure weights on a book value basis?

Answer 1

Answer:

Weight to total capital

equity 9.31%

debt 90.69%

Explanation:

Book Values

Common Stock = $5 x 6 million = $30 million

Bonds outstanding

Assuming it first year after issuance of both bonds.

First bond = $145 million

Discount on bond = $145 million x (100% - 95%) = $7.25 million

Un-amortized Discount = $7.25 x (24-1)/24 = $6.95 million

Book value = $145 million - $6.95 million = $138.05

Second bond = $130 million

Premium on bond = $145 million x (107% -100%) = $10.15 million

Un-amortized Discount = $10.15 x (9-1)/9 = $9.02 million

Book value = $145 million + $9.02 million = $154.02

Total value of debt = $138.05 million + $154.02 million = $292.07 million

Total Capital = $30 million  + $292.07 million = $322.07 million

Capital Structure weight

Equity = $30 / $322.07 = 0.0931 = 9.31%

Debt = $292.07 / $322.07 = 0.9069 = 90.69%