Question

Filer Manufacturing has 8 million shares of common stock outstanding. The current share price is $74, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $80 million and a coupon rate of 9 percent and sells for 95 percent of par. The second issue has a face value of $60 million and a coupon rate of 10 percent and sells for 108 percent of par. The first issue matures in 24 years, the second in 8 years.

a.	What are the company’s capital structure weights on a book value basis? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)

Equity/Value
Debt/Value

b.	What are the company’s capital structure weights on a market value basis? (Do not round intermediate calculations. Round your answers to 4 decimal places (e.g., 32.1616).)

Equity/Value
Debt/Value

c.	Which are more relevant, the book or market value weights?
	Market value Book value

Answer 1

a

BV of equity=Price of equity*number of shares outstanding

BV of equity=5*8000000

=40000000

BV of Bond1=Par value*bonds outstanding*%age of par

BV of Bond1=1000*80000*1

=80000000

BV of Bond2=Par value*bonds outstanding*%age of par

BV of Bond2=1000*60000*1

=60000000

BV of firm = BV of Equity + BV of Bond1+ BV of Bond 2

=40000000+80000000+60000000

=180000000

Weight of equity = BV of Equity/BV of firm

Weight of equity = 40000000/180000000

W(E)=0.2222

Weight of debt = BV of Bond/BV of firm

Weight of debt = 140000000/180000000

W(D)=0.7778

b

MV of equity=Price of equity*number of shares outstanding

MV of equity=74*8000000

=592000000

MV of Bond1=Par value*bonds outstanding*%age of par

MV of Bond1=1000*80000*0.95

=76000000

MV of Bond2=Par value*bonds outstanding*%age of par

MV of Bond2=1000*60000*1.08

=64800000

MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2

=592000000+76000000+64800000

=732800000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 592000000/732800000

W(E)=0.8079

Weight of debt = MV of Bond/MV of firm

Weight of debt = 140800000/732800000

W(D)=0.1921

c