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. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $70 million and a 8 percent coupon and sells for 94 percent of par. The second issue has a face value of $40 million and a 9 percent coupon and sells for 107 percent of par. The first issue matures in 6 years, the second in 23 years. 6.66 points a. What are Filer's capital structure weights on a book value basis? (Do not round intermediate calculations. Round the final answers to 4 decimal places.) eBook Print Equity / Value Debt / value References b. What are Filer's capital structure weights on a market value basis? (Do not round intermediate calculations. Round the final answers to 4 decimal places.) Equity / Value Debt / Value c. Which are more relevant? Market value Book value

Answer 1

Information Given

Shares of common stock outstanding	7,000,000
Current share price	$79
Book value per share	$6
Number of bond issues outstanding	2
First bond issue face value	$70,000,000
First bond issue coupon rate	8%
First bond issue sells for	94 % of Par
Second bond issue face value	$40,000,000
Second bond issue coupon rate	9%
Second bond issue sells for	107% of Par
First bond issue matures in	6 Years
Second bond issue matures in	23 Years

a) Filer’s capital structure weights on a book value basis as

Equity = Outstanding Shares * Book Value = 7,000,000 * $6 = $ 42,000,000

Debt = Face Value of Bonds = $ 70,000,000 + $ 40,000,000 = $ 110,000,000

Total Book Value of the company is = Equity + Debt = $ 42,000,000 + $ 110,000,000 = $ 152,000,000

The book value weights of equity and debt are:

Equity/ Value = $ 42,000,000/ $ 152,000,000 = 0.2763

Debt / Value = $ 110,000,000 / $ 152,000,000 = 0.7237

b) Filer’s capital structure weights on a market value basis as

Equity = Outstanding Shares * Market Value = 7,000,000 * $ 79 = $ 553,000,000

Debt = The total market value of debt is the price quote times the par value of the bond

Market Value of First Bond = $ 70,000,000 * 94% = $ 65,800,000

Market Value of Second Bond = $ 40,000,000 * 107% = $ 42,800,000

Total Market Value of Debt = $ 65,800,000 + $ 42,800,000 = $ 108,600,000

Total Market Value of Company = Equity + Debt = $ 553,000,000 + $ 108,600,000 = $ 661,600,000

Equity/ Value = $ 553,000,000/ $ 661,600,000 = 0.8359

Debt / Value = $ 108,600,000 / $ 661,600,000 = 0.1641

c) The Market Value weights are more relevant than Book Value Weights.

So the correct ans is a) Market Value.