Dinklage Corp. has 10 million shares of common stock outstanding. The current sh

Question

Dinklage Corp. has 10 million shares of common stock outstanding. The current share price is $82, 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 $85 million, a coupon of 5 percent, and sells for 97 percent of par. The second issue has a face value of $55 million, a coupon of 6 percent, and sells for 105 percent of par. The first issue matures in 20 years, the second in 9 years.

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

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

Dinklage Corp. has 10 million shares of common stock outstanding. The current share price is $82, 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 $85 million, a coupon of 5 percent, and sells for 97 percent of par. The second issue has a face value of $55 million, a coupon of 6 percent, and sells for 105 percent of par. The first issue matures in 20 years, the second in 9 years.

Explanation / Answer

a. Capital Structure Weights: Equity/Value                          0.26 Debt/Value                          0.74 b. Capital Structure Weights: Equity/Value                          0.85 Debt/Value                          0.15 Working: a. Equity: Book Value of common stock =            1,00,00,000 x $ 5 = $          5,00,00,000 Debt: Book Value of First Bond = $       8,50,00,000 Book Value of Second Bond = $       5,50,00,000 $       14,00,00,000 Total Capital Value $       19,00,00,000 Capital Structure Weights: Equity/Value =            5,00,00,000 / 19,00,00,000 = 0.26 Debt/Value =         14,00,00,000 / 19,00,00,000 = 0.74                            1.00 b. Equity: Market Value of common stock =            1,00,00,000 x $ 82 = $       82,00,00,000 82,00,00,000 Debt: Market Value of First Bond = $       8,50,00,000 x 97% =              8,24,50,000 Market Value of Second Bond = $       5,50,00,000 x 105% =              5,77,50,000 14,02,00,000 Total Capital Value 96,02,00,000 Capital Structure Weights: Equity/Value =         82,00,00,000 / 96,02,00,000 = 0.85 Debt/Value =         14,02,00,000 / 96,02,00,000 = 0.15 1.00

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