Dinklage Corp. has 10 million shares of common stock outstanding. The current sh
ID: 2790173 • 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.
What are the company's capital structure weights on a book value basis?
What are the company’s capital structure weights on a market value basis?
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.
Explanation / Answer
a. Capital Structure Weights: Equity/Value 0.26 Debt/Value 0.74 b. Capital Structure Weights: Equity/Value 0.85 Debt/Value 0.15 Working: a. Equity: Book Value of common stock = 1,00,00,000 x $ 5 = $ 5,00,00,000 Debt: Book Value of First Bond = $ 8,50,00,000 Book Value of Second Bond = $ 5,50,00,000 $ 14,00,00,000 Total Capital Value $ 19,00,00,000 Capital Structure Weights: Equity/Value = 5,00,00,000 / 19,00,00,000 = 0.26 Debt/Value = 14,00,00,000 / 19,00,00,000 = 0.74 1.00 b. Equity: Market Value of common stock = 1,00,00,000 x $ 82 = $ 82,00,00,000 82,00,00,000 Debt: Market Value of First Bond = $ 8,50,00,000 x 97% = 8,24,50,000 Market Value of Second Bond = $ 5,50,00,000 x 105% = 5,77,50,000 14,02,00,000 Total Capital Value 96,02,00,000 Capital Structure Weights: Equity/Value = 82,00,00,000 / 96,02,00,000 = 0.85 Debt/Value = 14,02,00,000 / 96,02,00,000 = 0.15 1.00