Masterson, Inc., has 5 million shares of common stock outstanding. The current share price is $77, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $110 million, has a coupon rate of 6 percent, and sells for 94 percent of par. The second issue has a face value of $95 million, has a coupon rate of 5 percent, and sells for 106 percent of par. The first issue matures in 20 years, the second in 9 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? a. Equity/Value Debt/Value b. Equity/Value Debt/Value c. More relevant
Masterson, Inc., has 5 million shares of common stock outstanding. The current share price is $77, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $110 million, has a coupon rate of 6 percent, and sells for 94 percent of par. The second issue has a face value of $95 million, has a coupon rate of 5 percent, and sells for 106 percent of par. The first issue matures in 20 years, the second in 9 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? a. Equity/Value Debt/Value b. Equity/Value Debt/Value c. More relevant
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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please provide full solutions. preferably in excel.
Transcribed Image Text:Minion, Ic., has no debt outstanding and a total market value of $220,000. Earnings
before interest and taxes, EBIT, are projected to be $40,000 if economic conditions are
normal. If there is strong expansion in the economy, then EBIT will be 10 percent higher.
If there is a recession, then EBIT will be 20 percent lower. The company is considering a
$135,000 debt issue with an interest rate of 4 percent. The proceeds will be used to
repurchase shares of stock. There are currently 11,000 shares outstanding. Ignore taxes
for this problem.
a-1. Calculate earnings per share (EPS) under each of the three economic scenarios
before any debt is issued. (Do not round intermediate calculations and round your
answers to 2 decimal places, e.g., 32.16.)
a-2. Calculate the percentage changes in EPS when the economy expands or enters a
recession. (A negative answer should be indicated by a minus sign. Do not round
intermediate calculations and enter your answers as a percent rounded to 2
decimal places, e.g., 32.16.)
b-1. Calculate earnings per share (EPS) under each of the three economic scenarios
assuming the company goes through with recapitalization. (Do not round
intermediate calculations and round your answers to 2 decimal places, e.g.,
32.16.)
b-2. Given the recapitalization, calculate the percentage changes in EPS when the
economy expands or enters a recession. (A negative answer should be indicated
by a minus sign. Do not round intermediate calculations and enter your answers
as a percent rounded to 2 decimal places, e.g., 32.16.)
a-1. Recession EPS
Normal EPS
Expansion EPS
a-2. Recession percentage change in EPS
Expansion percentage change in EPs
b-1. Recession EPS
Normal EPS
Expansion EPS
b-2. Recession percentage change in EPS
Expansion percentage change in EPS
3.64
%
%
$
8.14
%
%
Transcribed Image Text:Masterson, Inc., has 5 million shares of common stock outstanding. The current share
price is $77, and the book value per share is $8. The company also has two bond issues
outstanding. The first bond issue has a face value of $110 million, has a coupon rate of 6
percent, and sells for 94 percent of par. The second issue has a face value of $95
million, has a coupon rate of 5 percent, and sells for 106 percent of par. The first issue
matures in 20 years, the second in 9 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?
a. Equity/Value
Debt/Value
b. Equity/Value
Debt/Value
c. More relevant
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