Dinklage Corp. has 6 million shares of common stock outstanding. The current sha
ID: 2805260 • Letter: D
Question
Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $85, 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 $65 million, a coupon of 8 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon of 9 percent, and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 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 6 million shares of common stock outstanding. The current share price is $85, 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 $65 million, a coupon of 8 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon of 9 percent, and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 years.
Explanation / Answer
Answer to Part a)
Book Value of Equity = 6 Million Shares * $8
Book Value of Equity = $48 Million
Book Value of Debt = $65 Million + $40 Million
Book Value of Debt = $105 Million
Total Value of the Company = $48 Million + $105 Million
Total Value of the Company = $153 Million
Weight of Equity = 48 / 153
Weight of Equity = 0.3137
Weight of Debt = 105 / 153
Weight of Debt = 0.6863
Answer to Part b)
Market Value of Equity = 6 Million Shares * $85
Market Value of Equity = $510 Million
Market Value of Debt = Market Value of First Issue + Market Value of Second Issue
Market Value of First Issue = $65 Million * 0.95
Market Value of First Issue = $61.75 Million
Market Value of Second Issue = $40 Million * 1.08
Market Value of Second Issue = $43.20 Million
Market Value of Debt = $61.75 Million + $43.20 Million
Market Value of Debt = $104.95 Million
Total Value of the Company = $510 Million + $104.95 Million
Total Value of the Company = $614.95 Million
Weight of Equity = 510/ 614.95
Weight of Equity = 0.8293
Weight of Debt = 104.95/614.95
Weight of Debt = 0.1707
Answer to Part c)
Market Value Weights are more relevant, as it is based on the Current position of the Company.