Filer Manufacturing has 7 million shares of common stock outstanding. The curren

Question

Filer Manufacturing has 7 million shares of common stock outstanding. The current share price is $79, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value $70 million, a coupon of 8 percent, and sells for 94 percent of par. The second issue has a face value of $40 million, a coupon of 9 percent, and sells for 107 percent of par. The first issue matures in 23 years, the second in 6 years. What are the company's capital structure weights on a book value basis? What are the company's capital structure weights on a market value basis? Which are more relevant?

Explanation / Answer

Ans) Capital structure weights on a book value basis

Total value of firm = 42,000,000+70,000,000 + 40,000,000 =152,000,000

Capital Structure 27.63% is equity and 72.37% is Debt

Debt equity ratio is 2.7

2.Capital structure weights on a market value basis

Total value of firm =553,000,000+65,800,000+42,800,000 =661,600,000

Capital Structure 83.6% is equity and 16.4% is Debt

Debt equity ratio is 0.20

3 Capital structure based on market is more relevant

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