Question

1. Filer Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $70 million, an 8 percent coupon, and sells for 104 percent of par. The second issue has a face value $50 million, a 7.5 percent coupon, and sells for 97 percent of par. The first issue matures in 10 years, the second in 6 years.(assume each unit of bond has a face value of $1,000)

1. What are Filer’s capital structure weights on book value basis?
2. What are Filer’s capital structure weights on a market value basis?
3. Which are more relevant, the book or market value weights? Why?

Please show work, not only excel's tables.

Answer 1

A. Filer’s capital structure weights on book value basis

Book value of equity = 8.2m * $5

Book value of equity = $41m

Book value of debt = $70m + $50m = $120m

Total capital = $41m+$120m = $161m

Equity weight = $41m/$161m = 25.5%

Debt weight = $120m/$161m = 74.5%

B. Filer’s capital structure weights on a market value basis

Market value of equity = 8.2m * $52

Market value of equity = $426.4m

Market value of debt = $70m*1.04 + $50m*0.97 = $121.3m

Total capital = $426.4m+$121.3m = $547.7m

Equity weight = $426.4m/$547.7m = 77.85%

Debt weight = $121.3m/$547.7m = 22.15%

C. Market weight are more relevant. Market weights are more relevant because the market value depicts the correct value of the balance sheet and company. If we see the above calculation, there is an dramatic change in weights. Also, In company valuation we always use market value to find the current value of the company