Dinklage Corp. has 8 million shares of common stock outstanding. The current sha
ID: 2787185 • Letter: D
Question
Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $74, 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 $80 million, a coupon of 9 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, a coupon of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 8 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
(a).
Capital structure weight on a book value basis;
For equity;
Formula is as follow;
Equity book value / Total book value
Book value of equity (8000000 shares * $5) = $40000000
Book value of bonds ($80000000 + $60000000) = $140000000
Thus total book value will be ($40000000 + $140000000) = $180000000
Capital structure weight on a book value basis for equity will be as follow;
$40000000 / $180000000 = 0.2222
For debt;
Fomula is as follow;
Equity book value / Total book value
Capital structure weight on a book value basis for debt will be as follow;
$140000000 / $180000000 = 0.7778
(b).
Capital structure weight on a market value basis;
For equity;
Formula is as follow;
Equity market value / Total market value
Market value of equity (8000000 shares * $74) = $592000000
Market value of first bond ($80000000 * .95) = $76000000
Market value of second bond ($60000000 * 1.08) = $64800000
Thus total market value will be ($592000000+ $76000000 + $64800000) = $732800000
Capital structure weight on a market value basis for equity will be as follow;
$592000000/ $732800000 = 0.8079
For debt;
Fomula is as follow;
Debt market value / Total market value
Capital structure weight on a market value basis for debt will be as follow;
$14080000 / $732800000 = 0.1921