Question

Filer Manufacturing has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value $60 million, a coupon of 5 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 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

Answer 1

a. The company's capital structure weights on a book value basis is computed as shown below:

Total book value of Equity is computed as follows:

= 4 million shares x $ 5

= $ 20 million

Total book value of Debt is computed as follows:

= First bond face value + second bond face value

= $ 60 million + $ 40 million

= $ 100 million

Total value of equity and debt will be as follows:

= $ 20 million + $ 100 million

= $ 120 million

So equity weight will be:

= $ 20 million / $ 120 million

= 0.1667 Approximately

So debt weight will be:

= $ 100 million / $ 120 million

= 0.8333 Approximately

a. The company's capital structure weights on a market value basis is computed as shown below:

Total market value of Equity is computed as follows:

= 4 million shares x $ 70

= $ 280 million

Total book value of Debt is computed as follows:

= First bond value + second bond value

= $ 60 million x 0.95 + $ 40 million x 1.04

= $ 98.6 million

Total value of equity and debt will be as follows:

= $ 280 million + $ 98.6 million

= $ 378.6 million

So equity weight will be:

= $ 280 million / $ 378.6 million

= 0.7396 Approximately

So debt weight will be:

= $ 98.6 million / $ 378.6 million

= 0.2604 Approximately

c. The correct answer will be the option of market value of weights i.e. market value of weights are more relevant than book value of weights.

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