Filer Manufacturing has 8 million shares of common stock outstanding. The curren

Question

Filer Manufacturing has 8 million shares of common stock outstanding. The current share price is $87, and the book value per share is $6. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $75 million and a coupon rate of 10 percent and sells for 97 percent of par. The second issue has a face value of $50 million and a coupon rate of 11 percent and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 years.

What are the company

Explanation / Answer

1. On book value basis, company's capital structure weights would be as follows :

Debt Book Value would be as follows :

a) The book value of the first bond would be = $ 75000000*97% = $ 72750000

b) The book value of the second bond would be = $ 50000000 * 105% = $ 52500000

Equity book value would be as follows :

Book Value of Common Stock outstanding is= $ 48000000

Total Capital Raised = $ 173250000

Equity Weight in Capital Structure = 0.27 or 27%

Debt weight in Capital Structure = 0.72 or 72%.

b) Company's capital structure on market value basis :

Market Value of Common Stock = 696000000 ( 8000000*87)

On market value basis

Since, it is not mentioned at what point of time bond is issued, hence we assume that it has been issued just now. Hence, we assume that bonds have been issued recently and hence, we keep the market value of bonds equivalent to book value.

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