Dinklage Corp. has 5 million shares of common stock outstanding. The current sha

Question

Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $71, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $65 million, a coupon of 6 percent, and sells for 96 percent of par. The second issue has a face value of $45 million, a coupon of 7 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 5 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.)

Explanation / Answer

Answer:

a.

Calculation of Capital Structure Weights on Book Value Basis;

Total Capital employed in the business (book value in millions $) = 5x6 + 65 + 45 = $ 140 million

Weight of Equity = 30 / 140 or 3 /14 = 0.2143

Weight of Debt = 110 / 140 = 11/14 = 0.7857

b.

Calculation of Capital Structure Weights on Market Value Basis;

Total Capital employed in the business (market value in millions $) = 5x71 + 65 x 96% + 45 x 105% = $464.65 million

Weight of Equity = 355 / 464.65 or 0.7640

Weight of Debt = 109.65 / 464.65 or 0.2360

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