Dinklage Corp. has 9 million shares of common stock outstanding. The current sha

Question

Dinklage Corp. has 9 million shares of common stock outstanding. The current share price is $88, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, a coupon of 5 percent, and sells for 98 percent of par. The second issue has a face value of $55 million, a coupon of 6 percent, and sells for 106 percent of par. The first issue matures in 20 years, the second in 8 years.

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.)

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.)

Dinklage Corp. has 9 million shares of common stock outstanding. The current share price is $88, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, a coupon of 5 percent, and sells for 98 percent of par. The second issue has a face value of $55 million, a coupon of 6 percent, and sells for 106 percent of par. The first issue matures in 20 years, the second in 8 years.

Explanation / Answer

(a) Book value basis

BV of equity = 9 million x $7 = $63 million

BV of debt = $(80 + 55) = $135 million

Total capital = Equity + Debt = $(63 + 135) million = $198 million

Equity / Value = 63 / 198 = 0.318182 = 31.8182%

Debt / Value = 135 / 198 = 0.681818 = 68.1818%

(b) market value basis

MV of equity = 9 million x $88 = $792 million

MV of debt = ($80 million x 0.98 + $55 million x 1.06) = $78.4 million + $58.3 mllion = $136.7 million

Total capital = $(792 + 136.7) million = $928.7 million

Equity / Value = 792 / 928.7 = 0.852805 = 85.2805%

Debt / Value = 136.7 / 928.7 = 0.147195 = 14.7195%

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