Dinklage Corp. has 8 million shares of common stock outstanding. The current sha
ID: 2716911 • Letter: D
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.
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.)
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.)
Which are more relevant, the book or market value weights?
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.
Explanation / Answer
.
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.)
Book Value of Equity = 8*6= $ 48 Million
Book value of Debt = first bond issue Face Value + second issue bond face value
Book value of Debt = 75 + 50
Book value of Debt = $ 125 Million
Total Book Value = 48 + 125
Total Book Value = $ 173
Weight of equity on a book value basis = Book Value of Equity /Total Book Value
Weight of equity on a book value basis = 48/173
Weight of equity on a book value basis = 0.2775
Weight of debt on a book value basis = Book Value of Debt /Total Book Value
Weight of debt on a book value basis = 125/173
Weight of debt on a book value basis = 0.7225
Answer
Equity/Value 0.2775
Debt/Value 0.7225
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.)
Market Value of Equity = 8*87 = $ 696 Million
Market value of Debt = first bond issue Face Value *97% + second issue bond face value*105%
Market value of Debt = 75*97% +50*105%
Market value of Debt = $ 125.25 Million
Total Market Value = 696+125.25
Total Market Value = $ 821.25
Weight of equity on a market value basis = Market Value of Equity /Total market Value
Weight of equity on a market value basis = 696/821.25
Weight of equity on a market value basis = 0.8475
Weight of debt on a market value basis = Market Value of debt /Total market Value
Weight of debt on a market value basis = 125.25/821.25
Weight of debt on a market value basis = 0.1525
Answer
Equity/Value 0.8475
Debt/Value 0.1525
c.Which are more relevant, the book or market value weights?
Market value