Dinklage Corp. has 6 million shares of common stock outstanding. The current sha

Question

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $72, 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 $70 million, a coupon of 7 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon of 8 percent, and sells for 106 percent of par. The first issue matures in 22 years, the second in 6 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.)

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $72, 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 $70 million, a coupon of 7 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon of 8 percent, and sells for 106 percent of par. The first issue matures in 22 years, the second in 6 years.

Explanation / Answer

Book Value of equity = Book Value Per Share x Number of Shares
=> $7 x 6,000,000 = $42,000,000

Book Value of the debt = Face Value of the company’s debt
=> $70,000,000 + $50,000,000 = $120,000,000

So, the total value of the company = Book Value of the equity + Book Value of the debt
=> $42,000,000 + $120,000,000 = $162,000,000

So, the book value weights are:

Equity = $42,000,000/$162,000,000 = 0.2593 or 25.93%

Debt = $120,000,000/$162,000,000 = 0.7407 or 74.07%

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