Question

Filer Manufacturing has 9 million shares of common stock outstanding. The current share price is $81, and the book value per share is $8. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $80 million and a coupon rate of 10 percent and sells for 96 percent of par. The second issue has a face value of $50 million and a coupon rate of 11 percent and sells for 104 percent of par. The first issue matures in 25 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?

Answer 1

a

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

BV of equity=8*9000000

=72000000

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*50000*1

=50000000

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

=72000000+80000000+50000000

=202000000

Weight of equity = BV of Equity/BV of firm

Weight of equity = 72000000/202000000

W(E)=0.3564

Weight of debt = BV of Bond/BV of firm

Weight of debt = 130000000/202000000

W(D)=0.6436

b

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

MV of equity=81*9000000

=729000000

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

MV of Bond1=1000*80000*0.96

=76800000

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

MV of Bond2=1000*50000*1.04

=52000000

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

=729000000+76800000+52000000

=857800000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 729000000/857800000

W(E)=0.8498

Weight of debt = MV of Bond/MV of firm

Weight of debt = 128800000/857800000

W(D)=0.1502

c

Market value weights are more relevant