Dinklage Corp. has 4 million shares of common stock outstanding. The current sha
ID: 2803900 • Letter: D
Question
Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $83, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $90 million, a coupon of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, a coupon of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years.
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.)
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.)
Which are more relevant, the book or market value weights?
Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $83, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $90 million, a coupon of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, a coupon of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 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 c.Which are more relevant, the book or market value weights?
Market value Book valueExplanation / Answer
Answer a.
Equity:
Number of common stock outstanding = 4,000,000
Book Value per share = $8
Book Value of Common Stock = Number of common stock outstanding * Book Value per share
Book Value of Common Stock = 4,000,000 * $8
Book Value of Common Stock = $32,000,000
Debt:
Bond 1:
Face Value = $90,000,000
Bond 2:
Face Value = $60,000,000
Book Value of Debt = Face Value of Bond 1 + Face Value of Bond 2
Book Value of Debt = $90,000,000 + $60,000,000
Book Value of Debt = $150,000,000
Total Book Value of Firm = Book Value of Debt + Book Value of Equity
Total Book Value of Firm = $150,000,000 + $32,000,000
Total Book Value of Firm = $182,000,000
Weight of Debt = Book Value of Debt / Total Book Value of Firm
Weight of Debt = $150,000,000 / $182,000,000
Weight of Debt = 0.8242
Weight of Equity = Book Value of Equity / Total Book Value of Firm
Weight of Equity = $32,000,000 / $182,000,000
Weight of Equity = 0.1758
Answer b.
Equity:
Number of common stock outstanding = 4,000,000
Market Value per share = $83
Market Value of Common Stock = Number of common stock outstanding * Market Value per share
Market Value of Common Stock = 4,000,000 * $83
Market Value of Common Stock = $332,000,000
Debt:
Bond 1:
Face Value = $90,000,000
Market Value of Bond 1 = 98%*$90,000,000
Market Value of Bond 1 = $88,200,000
Bond 2:
Face Value = $60,000,000
Market Value of Bond 2 = 106%*$60,000,000
Market Value of Bond 2 = $63,600,000
Market Value of Debt = Market Value of Bond 1 + Market Value of Bond 2
Market Value of Debt = $88,200,000 + $63,600,000
Market Value of Debt = $151,800,000
Total Market Value of Firm = Market Value of Debt + Market Value of Equity
Total Market Value of Firm = $151,800,000 + $332,000,000
Total Market Value of Firm = $483,800,000
Weight of Debt = Market Value of Debt / Total Market Value of Firm
Weight of Debt = $151,800,000 / $483,800,000
Weight of Debt = 0.3138
Weight of Equity = Market Value of Equity / Total Market Value of Firm
Weight of Equity = $332,000,000 / $483,800,000
Weight of Equity = 0.6862
Answer c.
Market value weights are more relevant than book value weights as market value weight reflect current position of company.