Dinklage Corp. has 4 million shares of common stock outstanding. The current sha

Question

Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $83, 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 $90 million, a coupon of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, a coupon of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years. What are the company's capital structure weights on a book value basis? ( Equity/Value, Debt/Value). What are the company’s capital structure weights on a market value basis?( Equity/Value, Debt/Value).

Explanation / Answer

Common Stock = At Market Value = 4 m * $83 = $332 m

At Book Value = 4 m * $8 = $32 m

Debt = First Bond issue = At Market Value = $90 m * 98% = $88.20 m

At Book value = $90 m

Second Bond Issue = At Market Value = $60 m * 106% = $63.60 m

At Book value = $60 m

Company's capital structure weights on a book value basis :

Equity/Value = $32m / ($32m+$90m+$60m) = 0.1758 Debt/Value =($90+$60)m / ($32m+$90m+$60m) = 0.8242

Company's capital structure weights on a Market Value basis :

Equity/Value = $332m / ($332m+$88.20m+$63.60m) = 0.6862 Debt/Value =($88.20+$63.60)m / ($332m+$88.20m+$63.60m) = 0.3138

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