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 $86, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value $70 million, has a coupon of 9 percent, and sells for 96 percent of par. The second issue has a face value of $45 million, has a coupon of 10 percent, and sells for 104 percent of par. The first issue matures in 24 years, the second in 6 years.

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

Equity/ Value:

Debt / Value :

b. What are Filer's capital structure weights on a market value basis? (Do not round intermediate calculations and round your final answers to 4 decimal places. (e.g., 32.1616)) Equity / Value:

Debt / Value:

Explanation / Answer

Solution.

The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company’s debt,

so: Equity = 7,000,000($5) = $35,000,000

Debt = $70,000,000 + 45,000,000 = $115,000,000

So, the total book value of the company is:

Book value = $35,000,000 + $115,000,000 = $150,000,000

And the book value weights of equity and debt are:

Equity / Value =$35,000,000 / $150,000,000 = .2333

Debt / Value = 1 – Equity / Value

= .7666

b. The market value of equity is the share price times the number of shares,

so: S = 7,000,000($86) = $602,000,000

Using the relationship that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt is

B = .96($70,000,000) + 1.04($45,000,000) = $114,000,000

This makes the total market value of the company:

V = $602,000,000 + $114,000,000 = $716,000,000

And the market value weights of equity and debt are:

S / V = $602,000,000 / $716,000,000 = .8407

B / V = 1 – E / V = .1592

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