Answer:
Masterson, Inc.
1. The company's capital structure weights on a book value basis are:
Book Value Weights:
Equity = 0.27 or 27%
Debts = 0.73 0r 73%
2. The company's capital structure weights on market value basis are:
Market Value Weights:
Equity = 0.75 or 75%
Debts = 0.25 or 25%
3. The market value weights of Masterson's common stock and debts are more relevant because they represent a more current valuation of the equity and the debts. It is easier to calculate the book value weights since the information is more readily available within the entity than the information on market weights.
Explanation:
a) Data and Calculations:
Equity Units Total Value
Outstanding common stock 4.4 million shares
Current share price $89.50 $393.8 million
Book value per share $11.25 $49.5 million
Debt Units Total Value
First bond:
Face value 81,000 $81 million
Market value 81,000 $78.165 million
Coupon rate = 5.1% $4.131 million p.a.
Second bond:
Face value 53,000 $53 million
Market value 53,000 $54.445 million
Coupon rate = 5.3% $2,809 million p.a.
Total book value of bonds 134,000 $134 million
Total market value of bonds 134,000 $132.61 million
Capital structure Equity Bonds Total
Book value $49.5 million $134 million $183.5 million
Market value $393.8 million $132.61 million $526.41 million
Book Value Weights:
Equity = $49.5/$183.5 = 0.27 or 27%
Debts = $134/$183.5 = 0.73 0r 73%
Market Value Weights:
Equity = $393.8/$526.41 = 0.75 or 75%
Debts = $132.61/$526.41 = 0.25 or 25%
