Filer Manufacturing has 6 million shares of common stock outstanding. The curren

Question

Filer Manufacturing has 6 million shares of common stock outstanding. The current share price is $72, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value $70 million, a coupon of 7 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon of 8 percent, and sells for 106 percent of par. The first issue matures in 22 years, the second in 6 years.

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

Equity / Value=

Debt / Value =

c. Which are more relevant?

Market value weights or Book value weights?

Explanation / Answer

(a) Book value (BV) basis

BV of equity = 6 million x $7 = $42 million

BV of debt = $(70 + 50) million = $120 million

Weight of equity = 42 / (42 + 120) = 42 / 162 = 0.2593

Weight of debt = 1 - 0.2593 = 0.7407

(b) Market value (MV) basis

MV of equity = 6 million x $72 = $432 million

MV of debt = ($70 million x 0.97) + ($50 million x 1.06) = $(67.9 + 53) million = $120.9 million

Weight of equity = 432 / (432 + 120.9) = 432 / 552.9 = 0.7813

Weight of debt = 1 - 0.7813 = 0.2187

(c) Since market value of equity has gone up by a very large proportion compared to book value of equity, market value basis is more relevant.

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