Filer Manufacturing has 8 million shares of common stock outstanding. The curren
ID: 2729645 • Letter: F
Question
Filer Manufacturing has 8 million shares of common stock outstanding. The current share price is $80, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value $75 million, a coupon of 9 percent, and sells for 95 percent of par. The second issue has a face value of $45 million, a coupon of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 7 years.
What are the company's capital structure weights on a book value basis? Equity/value & Debt value
What are the company's capital structure weights on a market value basis? Equity value & Debt value
Which are more relevant? Market value weights or book value weights Please show work!
Explanation / Answer
Answer No. 1:
Book Value of Equity=Book value per share*Shares outstanding
Book Value of Equity=7*8000000
Book Value of Equity=560000000
Book value of Debt=Face value of Bonds
Book value of Debt=75000000+45000000
Book value of Debt=120000000
Book value of Debts and Equity=Book value of Equity+Book value of Debts
Book value of Debts and Equity=560000000+120000000
Book value of Debts and Equity=680000000
Book value weights of equity=Book value of equity/Book value of debts and equity
Book value weights of equity=560000000/680000000
Book value weights of equity=.823
Book value weights of equity=Book value of debts/Book value of debts and equity
Book value of debts=120000000/680000000
Book value of debts=.176
Answer No. 2
Market value of equity=Market value per share*Shares outstanding
Market value of equity=80*8000000
Market value of equity=640000000
Market value of Debts=Face value of bonds*market value percent of par value
Market value of Debts=75000000*.95+45000000*1.08
Market value of Debts=119850000
Market value of Debts and Equity=Market value of Equity+Market value of Debts
Market value of Debts and Equity=640000000+119850000
Market value of Debts and Equity=759850000
Market value weights of equity=Market value of equity/Market value of debts and equity
Market value weights of equity=640000000/759850000
Market value weights of equity=640000000/759850000
Market value weights of equity=0.842
Market value weights of debt=Market value of debt/Market value of debts and equity
Market value weights of debt=119850000/759850000
Market value weights of debt=0.158
Answer No. 3
Market value weights are more relevant as it represents future cashflows discounted back to the present
Book Value of Equity=Book value per share*Shares outstanding
Book Value of Equity=7*8000000
Book Value of Equity=560000000
Book value of Debt=Face value of Bonds
Book value of Debt=75000000+45000000
Book value of Debt=120000000
Book value of Debts and Equity=Book value of Equity+Book value of Debts
Book value of Debts and Equity=560000000+120000000
Book value of Debts and Equity=680000000
Book value weights of equity=Book value of equity/Book value of debts and equity
Book value weights of equity=560000000/680000000
Book value weights of equity=.823
Book value weights of equity=Book value of debts/Book value of debts and equity
Book value of debts=120000000/680000000
Book value of debts=.176
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