Dinklage Corp. has 10 million shares of common stock outstanding. The current sh
ID: 2726636 • Letter: D
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. 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 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
The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company’s debt, so:
Equity = 10,000,000*(5) = $50,000,000
Debt = 85,000,000+55,000,000 = 140,000,000
So, the total value of the company = $50,000,000+$14,000,000 = $190,000,000
And the book value weights of equity and debt are:
Equity/Value = 50,000,000/190,000,000 = 0.2632
Debt/ value = 140,000,000/190,000,000 = 0.7368
b. The market value of equity is the share price times the number of shares, so:
S = 10,000,000($82) = $820,000,000
Using the relationship that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt isB = .97*85,000,000+1.05*55,000,000 = $82,450,000+$57,750,000 = $140,200,000
This makes the total market value of the company:
V = $820,000,000+140,200,000 = $960,200,000
And the market value weights of equity and debt are:
S/V = 820,000,000/960,200,000 = 0.8539
B/V = 140,200,000/960,200,000 = 0.14601