Dinklage Corp. has 10 million shares of common stock outstanding. The current sh
ID: 2615124 • Letter: D
Question
Dinklage Corp. has 10 million shares of common stock outstanding. The current share price is $82, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $85 million, a coupon of 5 percent, and sells for 97 percent of par. The second issue has a face value of $55 million, a coupon of 6 percent, and sells for 105 percent of par. The first issue matures in 20 years, the second in 9 years. a. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.) Equity/Value Debt/Value b. What are the company’s capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.) Equity/Value Debt/Value c. Which are more relevant, the book or market value weights? Market value Book value
Explanation / Answer
Answer a.
Debt:
First Issue of Bonds:
Face Value = $85,000,000
Second Issue of Bonds:
Face Value = $55,000,000
Total Book Value of Debt = Face Value of First Issue of Bonds + Face Value of Second Issue of Bonds
Total Book Value of Debt = $85,000,000 + $55,000,000
Total Book Value of Debt = $140,000,000
Equity:
Number of shares outstanding = 10,000,000
Par Value = $5
Book Value of Equity = Number of shares outstanding * Par Value
Book Value of Equity = 10,000,000 * $5
Book Value of Equity = $50,000,000
Total Book Value of Firm = Book Value of Debt + Book Value of Equity
Total Book Value of Firm = $140,000,000 + $50,000,000
Total Book Value of Firm = $190,000,000
Weight of Debt = Book Value of Debt / Total Book Value of Firm
Weight of Debt = $140,000,000 / $190,000,000
Weight of Debt = 0.7368
Weight of Equity = Book Value of Equity / Total Book Value of Firm
Weight of Equity = $50,000,000 / $190,000,000
Weight of Equity = 0.2632
Answer b.
Debt:
First Issue of Bonds:
Face Value = $85,000,000
Current Price = 97% * Face Value
Current Price = 97% * $85,000,000
Current Price = $82,450,000
Second Issue of Bonds:
Face Value = $55,000,000
Current Price = 105% * Face Value
Current Price = 105% * $55,000,000
Current Price = $57,750,000
Total Market Value of Debt = Current Price of First Issue of Bonds + Current Price of Second Issue of Bonds
Total Market Value of Debt = $82,450,000 + $57,750,000
Total Market Value of Debt = $140,200,000
Equity:
Number of shares outstanding = 10,000,000
Current Price = $82
Market Value of Equity = Number of shares outstanding * Current Price
Market Value of Equity = 10,000,000 * $82
Market Value of Equity = $820,000,000
Total Market Value of Firm = Market Value of Debt + Market Value of Equity
Total Market Value of Firm = $140,200,000 + $820,000,000
Total Market Value of Firm = $960,200,000
Weight of Debt = Market Value of Debt / Total Market Value of Firm
Weight of Debt = $140,200,000 / $960,200,000
Weight of Debt = 0.1460
Weight of Equity = Market Value of Equity / Total Market Value of Firm
Weight of Equity = $820,000,000 / $960,200,000
Weight of Equity = 0.8540
Answer c.
We should use market value weights as they represent current value of firm.
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