Problem 14-12 Book Value versus Market Value [L03] Dinklage Corp. has 5 million
ID: 2753900 • Letter: P
Question
Problem 14-12 Book Value versus Market Value [L03] Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $77, and the book value per share is S8. The company also has two bond issues outstanding. The first bond issue has a face value of S60 million, a coupon of 6 percent, and sells for 97 percent of par. The second issue has a face value of $30 million, a coupon of 7 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 4 years.Explanation / Answer
a. Book value of equity = 5,000,000*8 = 40,000,000.
Book value of debt = 60 + 30 = 90 Milliom = 90,000,000
Hence Total Value = (40 + 90 ) Million = 130,000,000
Hence Equity/Value = 40/130 =0.3076
Debt/Value = 90/130 = 0.6924
b. Market Value based approach
Market Value of equity = 5 Million * 77 = 385,000,000
Market value of 1st debt issue. This is given by calculated the YTM using excel wherein YTM =rate(21, 0.06*60*10^6, -0.97*60*10^6, 60*10^6) = 6.26%
Hence Market value of first bond issue
=3.6*10^6*(1-(1/1.0626^21)/0.0626) + 60*10^6/1.0626^21 = 58,204,267.70
Market value of second debt issue : YTM is =rate(4,0.07*30*10^6,-1.05*30*10^6,30*10^6) = 6.55%
Hence Market value of 2nd bond issue
= 21.*10^6*(1-(1/1.0655^4)/0.0655) + 30*10^6/1.0655^ 4 = 30,461,957.55
Hence total value of debt = 88,666,225.25
Total Value = 88,666,225.25 + 385,000,000 = 473,666,225.25
Hence Equity/ Vaue = 385/473.666 = 0.8128
Hence Debt/Value = 0.1872
c. Market value Weights are more relevant