Problem:
Erna Corp. has 4 million shares of common stock outstanding. The current share price is $76, and the book value per share is $5. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $90 million, has a coupon of 5 percent, and sells for 94 percent of par. The second issue has a face value of $70 million, has a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 3 years.
Required:
Question 1: What are Erna's capital structure weights on a book value basis?
Question 2: What are Erna's capital structure weights on a market value basis?
Question 3: Which are more relevant, the book or market value weights?
Note: Explain all calculation and formulas.