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? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .3216.)
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., .3216.)

  
  

Answer 1

Debt:

1^st Issue of Bonds:

Face Value = $70,000,000

Market Value = 97% * $70,000,000
Market Value = $67,900,000

2^nd Issue of Bonds:

Face Value = $40,000,000

Market Value = 108% * $40,000,000
Market Value = $43,200,000

Equity:

Book Value = Book Value per share * Number of shares outstanding
Book Value = $8 * 7,000,000
Book Value = $56,000,000

Market Value = Current Price per share * Number of shares outstanding
Market Value = $68 * 7,000,000
Market Value = $476,000,000

Answer a.

Book Value of Debt = Face Value of 1^st Issue of Bonds + Face Value of 2^nd Issue of Bonds
Book Value of Debt = $70,000,000 + $40,000,000
Book Value of Debt = $110,000,000

Book Value of Equity = $56,000,000

Book Value of Firm = Book Value of Debt + Book Value of Equity
Book Value of Firm = $110,000,000 + $56,000,000
Book Value of Firm = $166,000,000

Weight of Debt = Book Value of Debt / Book Value of Firm
Weight of Debt = $110,000,000 / $166,000,000
Weight of Debt = 0.6627

Weight of Equity = Book Value of Equity / Book Value of Firm
Weight of Equity = $56,000,000 / $166,000,000
Weight of Equity = 0.3373

Answer b.

Market Value of Debt = Market Value of 1^st Issue of Bonds + Market Value of 2^nd Issue of Bonds
Market Value of Debt = $67,900,000 + $43,200,000
Market Value of Debt = $111,100,000

Market Value of Equity = $476,000,000

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $111,100,000 + $476,000,000
Market Value of Firm = $587,100,000

Weight of Debt = Market Value of Debt / Market Value of Firm
Weight of Debt = $111,100,000 / $587,100,000
Weight of Debt = 0.1892

Weight of Equity = Market Value of Equity / Market Value of Firm
Weight of Equity = $476,000,000 / $587,100,000
Weight of Equity = 0.8108