Dinklage Corp. has 7 million shares of common stock outstanding. The current sha
ID: 2789460 • Letter: D
Question
Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $79, 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 $70 milion, a coupon of 8 percent, and sells for 94 percent of par. The second issue has a face value of $40 million, a coupon of 9 percent, and sells for 107 percent of par. The first issue matures in 23 years, the second in 6 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.) EquityNalue DebtValue b. What are the company's capital structure weights on a market value basis? (Do not round intormodiate caloulations and round your answers to 4 decimal places, e.g., 32.1616.) Equity/Value Debt/ValueExplanation / Answer
Book value of Equity = Number of shares * book value per share = 7 Mn * $6 = $42 Mn
Book Value of first bond = $70 Mn
Book Value of second bond = $40 Mn
Book Value of total Capital = $42 Mn + $70 Mn + $40 Mn = $152 Mn
Weight of debt = (Book value of first bond + Book value of second bond)/ Book value of total Capital
= ($70 Mn + $40 Mn)/ $152 Mn = 0.7237
Weight of Equity = Book Value of Equity / Book value of total Capital
= $42 Mn / $152 Mn = 0.2763
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Market value of Equity = Number of shares * Market value per share = 7 Mn * $79 = $553 Mn
Market Value of first bond = Par value * percent of par = $70 Mn * 0.94 = $65.8 Mn
Market Value of second bond = Par value * percent of par = $40 Mn * 1.07 = $42.8 Mn
Market Value of total Capital = $553 Mn + $65.8 Mn + $42.8 Mn = $661.6 Mn
Weight of debt = (Market value of first bond + Market value of second bond)/ Market value of total Capital
= ($65.8 Mn + $42.8 Mn)/ $661.6 Mn = 0.1641
Weight of Equity = Market Value of Equity / Market value of total Capital
= $553 Mn / $661.6 Mn = 0.8359