Miiler Manufacturing has 4 million shares of common stock outstanding. The curre
ID: 2703738 • Letter: M
Question
Miiler Manufacturing has 4 million shares of common stock outstanding. The current share price is $76, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value $90 million, has a coupon of 5 percent, and sells for 94 percent of par. The second issue has a face value of $70 million, has a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 3 years.
a. What are Filer's capital structure weights on a book value basis?
b. What are Filer's capital structure weights on a market value basis?
c. Which are more relevant?
Explanation / Answer
a. Book value of equity =4*5 = 20 million
Book value of debt = $90 +$70 = 160 million
weight of debt = 160/(160+20) = 88.89%
weight of equity= 20/(160+20) = 11.11%
b. Market value of equity =4*76 = 304 million
Book value of debt = $90*94% +$70*104% = 157.4 million
weight of debt = 157.4/(157.4+304) = 34.11%
weight of equity= 304/(157.4+304)= 65.89%
c. capital structure weights on a market value basis