Question

Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $68, 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 $70 million, a coupon rate of 6 percent, and sells for 97 percent of par. The second issue has a face value of $40 million, a coupon rate of 6.5 percent, and sells for 108 percent of par. The first issue matures in 21 years, the second in 6 years. Both bonds make semiannual payments.a. What are the company's capital structure weights on a book value basis?b. What are the company's capital structure weights on a market value basis?

Answer 1

Answer:

a) book value weights:

• equity = 33.73%
• debt = 66.27%

b) market value weights:

• equity = 81.08%
• debt = 18.92%

Explanation:

total shares outstanding 7,000,000

market price $68 x 7,000,000 = $476,000,000

book price $8 x 7,000,000 = $56,000,000

bond 1:

book value = $70,000,000

market value = $67,900,000

bond 2:

book value = $40,000,000

market value = $43,200,000

total book value = $56 + $70 + $40 = $166,000,000

equity = $56 / $166 = 33.73%

debt = 66.27%

total market value = $476 + $67.9 + $43.2 = $587,100,000

equity = $476 / $587.1 = 81.08%

debt = 18.92%