Question

Masterson, Inc., has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $9. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a coupon rate of 7 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, has a coupon rate of 6 percent, and sells for 107 percent of par. The first issue matures in 25 years, the second in 8 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)	Equity / Value	0.2105
	Debt / Value	0.7895
(b)	Equity / Value	0.6740
	Debt / Value	0.3260

Company's capital structure weights on a book value basis

Book Value of Common Stock = $36,000,000 [4,000,000 shares x $9.00 per share]

Book Value of Debt = $135,000,000 [$75,000,000 + $60,000,000]

Total Book Value = $171,000,000

Capital structure weights of Common Stock = 0.2105 [$36,000,000 / $171,000,000]

Capital structure weights of Debt = 0.7895 [$135,000,000 / $171,000,000]

(b)-Company’s capital structure weights on a market value basis

Market Value of Common Stock = $280,000,000[4,000,000 shares x $70 per share]

Market Value of Debt = $135,450,000 [($75,000,000 x 95%) + ($60,000,000 x 107%)]

Total Market Value = $415,450,000

Capital structure weights of Common Stock = 0.6740 [$280,000,000 / $415,450,000]

Capital structure weights of Debt = 0.3260 [$135,450,000 / $415,450,000]

(c)-“The market value weight” is more relevant for calculating the company’s capital structure weights.