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 $76, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $90 million, a coupon of 5 percent, and sells for 94 percent of par. The second issue has a face value of $70 million, a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 3 years.

a. What are the company's capital structure weights on a book value basis?

b. What are the company’s capital structure weights on a market value basis?

Explanation / Answer

Companys Capital structure weights on a Book Value basis=

4 mill shares -current share price = 4 m*$ 76=304 }

$ 90 m 5% Coupon bond market rate =90*94=8460 } total =16044

$ 70 M 6% Coupon bond market rate =70*104=7280 }

so the weights are = common stock = 304/16044=1.89

5% bonds = 8460/16044=52.73

6% bonds = 7280/16044=45.38

as per book value=

common stock = 4m*$ 5=$20 }

5% bonds =$90*100=9000 } 16020

6% bonds =$ 70*100=7000 }

so the weights

common stock =20/16020 =0.12

5% bonds =9000/16020=56.18

6% bonds =7000/16020=43.70

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