Erna Corp. has 8 million shares of common stock outstanding. The current sha… Show more FIRST HALF OF QUESTION: Erna Corp. has 8 million shares of common stock outstanding. The current share price is $74, and the book value per share is $5. Erna Corp. also has two bonds issues outstanding. The first bond issue has a face value of $80 million, has a coupon rate of 9 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, has a coupon rate of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, and the second in 8 years. *First Half Of Question Solved* Solution: (a) What are Ernas capital structure weights on a book value basis? ANSWER: Equity/Value: 0.2222 Debt/Value: 0.7777 Solution: (b) What are Ernas capital strucutre weights on a market value basis? ANSWER: Equity/Value: 0.8079 Debt/Value: 0.1921 Solution: (c) What are more relevant, the book or market value weights? ANSWER: Market Value SECOND HALF OF QUESTION: Suppose the most recenet dividend was $4.60 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. What is the company’s WACC? *I need help with the second half of the solution* • Show less