Question

Filer Manufacturing has 11.6 million shares of common stock outstanding. The current share price is $45, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $92 million, has a 7 percent coupon, and sells for 92 percent of par. The second issue has a face value of $64.96 million, has a 7 percent coupon, and sells for 95.2 percent of par. The first issue matures in 10 years, the second in 6 years.

Requirement 1: (a) What is Filer's capital structure weight of equity on a book value basis? (Do not round your intermediate calculations.)

(b) What is Filer's capital structure weight of debt on a book value basis? (Do not round your intermediate calculations.)

Requirement 2: (a) What is Filer's capital structure weight of equity on a market value basis? (Do not round your intermediate calculations.)

(b) What is Filer's capital structure weight of debt on a market value basis? (Do not round your intermediate calculations.)

Answer 1

Total book value of equity =11.6 Million *4 = 46.4 Million

Total Book value of debt = 92 Million + 64.96 Million = 156.96 Million

Total = 203.36 Million

1(a) Weight of equity on a book value basis = 46.4/203.36 = 0.2282

1(b) Weight of debt on a book value basis 1-0.2282 = 0.7718

Market Value of Equity = 11.6 Million *45 = 522 Million

Market Value of debt = 92 Million * 0.92 + 64.96 Million * 0.952 = 146.48192 Million

Total = 668.48192 Million

2(a)  Weight of equity on a market value basis = 522/668.48192 = 0.7809

2(b) Weight of debt on a market value basis =1 -0.7809 = 0.2191