Filer Manufacturing has 7 million shares of common stock outstanding. The current share price is...

Question:

Filer Manufacturing has 7 million shares of common stock outstanding. The current share price is $73, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value $75 million, a coupon of 8 percent, and sells for 98 percent of par. The second issue has a face value of $55 million, a coupon of 9 percent, and sells for 107 percent of par. The first issue matures in 23 years, the second in 7 years.

a. What are the company's capital structure weights on a book value basis?

b. What are the company's capital structure weights on a market value basis?

Capital Strucutre:

Capital structure refers to the composition of debts and equities in a firm's total assets. Capital structure could be estimated either using the book values of debs and equities or using the market values. The market value approach is considered more relevant.

Answer and Explanation:

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a. Based on book value, the share of equity is 0.30, and the share of debt is 0.70.

The book value of common equity = 7*8 million = $56 million

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Capital Structure & the Cost of Capital

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Chapter 15 / Lesson 1
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In this lesson, we'll define capital and a firm's capital structure. We'll also discuss the costs associated with each component in the capital structure and learn about the concept of risk and return.


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