Dinklage Corp. has 5 million shares of common stock outstanding. The current sha
ID: 2760630 • Letter: D
Question
Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $71, 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 $65 million, a coupon of 6 percent, and sells for 96 percent of par. The second issue has a face value of $45 million, a coupon of 7 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 5 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.)
Explanation / Answer
Answer:
a.
Calculation of Capital Structure Weights on Book Value Basis;
Total Capital employed in the business (book value in millions $) = 5x6 + 65 + 45 = $ 140 million
Weight of Equity = 30 / 140 or 3 /14 = 0.2143
Weight of Debt = 110 / 140 = 11/14 = 0.7857
b.
Calculation of Capital Structure Weights on Market Value Basis;
Total Capital employed in the business (market value in millions $) = 5x71 + 65 x 96% + 45 x 105% = $464.65 million
Weight of Equity = 355 / 464.65 or 0.7640
Weight of Debt = 109.65 / 464.65 or 0.2360