Question

Filer Manufacturing has 9 million shares of common stock outstanding. The current share price is $88, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value $80 million, a coupon of 5 percent, and sells for 98 percent of par. The second issue has a face value of $55 million, a coupon of 6 percent, and sells for 106 percent of par. The first issue matures in 20 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 or Book value weights

Answer 1

a. Book Value of Common Stock = [9,000,000 shares * $7.00 per share] = $63,000,000

Book Value of Debt = [$80,000,000 + $55,000,000] = $135,000,000

Total Book Value = $63,000,000 + $135,000,000 = $198,000,000

Capital structure weights of Common Stock = [$63,000,000 / $198,000,000] = 0.3182

Capital structure weights of Debt = [$135,000,000 / $198,000,000] = 0.6818

b. Market Value of Common Stock = [9,000,000 shares x $88 per share] = $792,000,000

Market Value of Debt = [($80,000,000 x 98%) + ($55,000,000 x 106%)] = $136,700,000

Total Market Value = $792,000,000 + $136,700,000 = $928,700,000

Capital structure weights of Common Stock = [$792,000,000 / $928,700,000] = 0.8528

Capital structure weights of Debt = [$136,700,000 / $928,700,000] = 0.1472

c. Market values/weigh are always preferred because they reflect the current scenario.