1.

BOOK VALUE VERSUS MARKET VALUE

Filer Manufacturing ha 11 million shares of common stock outstanding. The current share price
is $68, and the book value per share is $6. Filer Manufacturing also has two bond issues
outstanding. The first bond issue has a face value of $70million, has 7 percent coupon, and sells
for 93 percent of par. The second issue has a face value of $55million, has an 8 percent coupon,
and sells for 104 percent of par. The first issue matures in 21 years, the second in 6 years.
a. What are Filers capital structure weights on a book value basis ?
b. What are Filers capital structure weights on a market value basis?
c. Which are more relevant, the book or market value weight? Why ?

SOLUTION
a) Book Value Basis
V= E+D
E = $6 11,000,000 Shares
= $66,000,000

D = $ 70,000,000 + $55,000,000
= $125,000,000

V = $66,000,000 + $125,000,000
= $191,000,000
E / V = 66,000,000/191,000,000

D / V = 125,000,000/191,000,000

Book value stock = 0.3455

Bond weight = 0.6545

b) Market Value Basis

Market price stock = $68 11,000,000
= 748,000,000
Bond 1=55,000,000/1000 = 55,000
104 1000 = 1040
55,000 1040 = 57,200,000

Bond 2=70,000,000/1000 = 70,000

93 x 100 = 930
70,000 x 93 = 65,100,000
E / V = 748,000,000/ 870,300,000
= 0.8595

D / V = 122,300,000/ 870,300,000
= 0.1405

c) Market value basis is more relevant than book value basis because the debt of market
value has the lowest debt.

2.

CALCULATING WACC
In problem 12, suppose the most recent dividend was $4.10 and the dividend growth rate is 6
percent. Assume that the overall cost of debt is the weighted average of that implied by the two
outstanding debt issue. Both bonds make semiannual payments. The tax rate is 35 percent. What
is the companys WACC ?
Re

= D1 = Do (1+g)
= 4.10 (1+0.06) = 4.346
=

D1 /Po

+g

= 4.346 /68 + 0.06 = 0.1239

Bond 1

Bond 2

N
42
PV 1040
PMT 35
FV 1000
CPT I/Y

N
12
PV
930
PMT 40
FV
1000
CPT I/Y

= 3.8382 2

= 3.5840 2

= 7.68 %

= 7.17 %

WACC = WeRe + WdRd (1 Tax) + WdRd (1 Tax)

= 748,000,000/870,300,000 (0.1239) + 57,200,000/870,300,000 (0.0768)(1-0.35)
+ 65,100,000/ 870,300,000 (0.0717)(1-0.35)
= 0.10649 + 0.00328 + 0.00349
= 0.1133 / 11.33 %