Question

Filer Manufacturing has 8 million shares of common stock outstanding. The current share price is $87, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value $75 million, a coupon of 10 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon of 11 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 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 Debt / Value S c. Which are more relevant? Market value weights Book value weights

Answer 1

Solution: Part a: wokring Book value in million) Book value weight b=a/173 0.2775 0.7225 Equity Debt Total value 8*6 75+50 48.00 125.00 173.00 Part b: wokring Market value in million) Market value weight b=a/821.25 0.8475 0.1525 Equity Debt Total value 8*87 75*0.97+50*1.05 696.00 125.25 821.25 Part c: market value weights