Dinklage Corp. has 7 million shares of common stock outstanding. The current sha
ID: 2712106 • Letter: D
Question
Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $86, 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 $70 million, a coupon of 9 percent, and sells for 96 percent of par. The second issue has a face value of $45 million, a coupon of 10 percent, and sells for 104 percent of par. The first issue matures in 24 years, the second in 6 years.
a)what are the company's capital structure weights on a book value basis?
equity/value=_________
debt/value=_________
b)What are the company's capital structure weights on a market value basis?
equity/value=________
debt/value=_______
Explanation / Answer
Book values
Total Book value of equity = no. of stocks x book value per share
= 7,000,000 x 5
=35,000,000
Book value of debt = 70,000,000 +45,000,000
= 115,000,000
Total book value = 35,000,000 +115,000,000
= 150,000,000
Equity / value = book value of equity / total value
= 35,000,000/150,000,000
= 0.2333
Debt/ value = book value of debt / total value
= 115,000,000/150,000,000
= 0.7667
b) Market values
Total market value of equity = no. of stocks x market value per share
= 7,000,000 x 86
=60,000,000
market value of debt = 70,000,000x96% +45,000,000x104%
= 114,000,000
Total market value = 602,000,000 +114,000,000
= 716,000,000
Equity / value = market value of equity / total value
= 602,000,000/716,000,000
= 0.8408
Debt/ value = market value of debt / total value
= 114,000,000/716,000,000
= 0.1592