Dinklage Corp. has 8 million shares of common stock outstanding. The current sha

Question

Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $87, 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 $75 million, a coupon of 10 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon of 11 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 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 .28 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.) Equity/Value Debt/Value

Explanation / Answer

Book value of shares = Number of shares outstanding * book value per share = 8 Mn * $6 = $48 Mn

Market value of shares = Number of shares outstanding * market value per share = 8 Mn * $87 = $696 Mn

Book value of first bond = Face value of first bond = $75 Mn

Market Value of first bond = 0.97 times the face value of first bond = $72.75 Mn

Book value of second bond = Face value of second bond = $50 Mn

Market Value of second bond = 1.05 times the face value of second bond = $52.5 Mn

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696/821.25

=0.8475

48/173

=0.2775

72.75/821.25

=0.0886

75/173

=0.4335

52.5/821.25

=0.0639

50/173

=0.2890

Instrument Market Value(in Mn dollars) Weights by Market Value Book Value(in Mn dollars) Weights by book Value Equity 696

696/821.25

=0.8475

48

48/173

=0.2775

First Bond 72.75

72.75/821.25

=0.0886

75

75/173

=0.4335

Second Bond 52.5

52.5/821.25

=0.0639

50

50/173

=0.2890

Total 821.25 1 173 1 Equity/Total Value 0.8475 0.2775 Debt/ Total Value 0.1525 0.7225

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