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. a. What are the company's capital structure weights on a book value basis? Equity/Value= Debt/Value=

Answer 1

Answer:

0.175824; 0.8242

Explanation:

Equity 1 = Shares of common stock outstanding × Book value per share

             = 4,000,000 × $8

             = $32,000,000

Debt 1 = $90,000,000

Debt 2 = $60,000,000

Total value = Equity 1 + Debt 1 + Debt 2

                  = $32,000,000 + $90,000,000 + $60,000,000

                  = $182,000,000

Weight of equity 1:

= Equity 1 ÷ Total value

= $32,000,000 ÷ $182,000,000

= 0.175824

Weight of debt 1:

= Debt 1 ÷ Total value

= $90,000,000 ÷ $182,000,000

= 0.494505

Weight of debt 2:

= Debt 1 ÷ Total value

= $60,000,000 ÷ $182,000,000

= 0.32967

Equity/Value = 0.175824

Debt/Value = Weight of debt 1 + Weight of debt 2

                    =  0.494505 + 0.32967

                    = 0.8242