Dinklage Corp. has 9 million shares of common stock outstanding. The current sha
ID: 2716802 • Letter: D
Question
Dinklage Corp. has 9 million shares of common stock outstanding. The current share price is $81, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, a coupon of 10 percent, and sells for 96 percent of par. The second issue has a face value of $50 million, a coupon of 11 percent, and sells for 104 percent of par. The first issue matures in 25 years, the second in 8 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
Explanation / Answer
(a)
The book value of Equity is the book value per share times the number of shares, and the book value of debt is the face value of the company's debt, so :
Book Value of Equity = 9,000,000($8) = $72,000,000
Book Value of Debt = $80,000,000 + $50,000,000 = $130,000,000
Therefore, the Value = $72,000,000 + 130,000,000 = $202,000,000
Equity/Value = $72,000,000/$202,000,000 = 0.3564
Debt/Value = 1-Equity/Value = 1-0.3564 = 0.6436
(b)
Calculation of Company's capital structure weights on a market value basis
Market Value of Equity = $9,000,000($81) = $729,000,000
Using the rule that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt:
Market Value of Debt = 960($80,000,000) + 1040($50,000,000) =$128,800,000,000
Value of the Company = $729,000,000 + $128,800,000,000 = $129,529,000,000
And the market value weights of equity and debt are :
Equity/Value = $729,000,000/$129,529,000,000 = 0.0056
Debt/Value = 1-Equity/Value = 1-0.0056 = 0.9943
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