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 $74, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value $80 million, a coupon of 9 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, a coupon of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 8 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 Book value weights

Explanation / Answer

1) calculation of book value weights

Equity book value = 8*5 = 40 Million

Debt 1 book value = 80 Million

Debt 2 book vaue = 60 Million

Total Equity and Debt = 180 Million

Equity weight = 40/180 = 22.2222%

Debt 1 weight = 80/180 = 44.4444%

Debt 2 weight = 60/180 = 33.3333%

2) calculation of market value weight

Value of equity = 8 * 74 = 592 Million

Value of Debt 1 = 80 * 95% = 76 Million

Value of Debt 2 = 60 * 108% = 64.8 Million

Total value of Debt and Equity = 732.8

Equity weight = 592/732.8 = 80.7860%

Debt 1 weight = 76/732.8 = 10.3712%

Debt 2 weight = 64.8/ 732.8 = 8.8428%

Market value weights are more relevant than book value weights as it shows the current picture of the company’s value in the market. Book value gives a historical picture.

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