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.
- 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
- 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
Answer:
1
The book value of equity is the boo value per share times the number ofshare ,
And the book value of debt is the face value of companies debt.
Now we calculate the book value of both the equity and debt as follow
BVe = 8 million x book value per share is $5
BVe = 8m x 5
BVe =40,000,000
BVd = first bond issue has a face value $80 million + The second issue has a face value of $60 million,
BVd = 80m + 60 m
BVd =140 m
So the total Value of the company is
V = 40,000,000 +140,000,000
=180,000,000
And the book value of the equity and debt are
E/V
40,000,000 / 180,000,000
0.222222222
D/V
140,000,000 /180,000,000
0.777777778
2
The market value of equity is the share price times the number of shares,
so:MVE
= 8,000,000($74)
= $592,000,000
Using the relationship that the total market value of debt is the price quote times the par value of thebond, we find the market value of debt is:
MVD
= 0.95($80,000,000) + 1.08($60,000,000)
= $140,800,000
This makes the total market value of the company
:V = $592,000,000 + 140,800,000
= $732,800,000
And the market value weights of equity and debt are
:E/V = $592,000,000/$732,800,000 = 0.8079
D/V = 1 – E/V = 0.1921
