Question

Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $74, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $95 million, a coupon rate of 7 percent, and sells for 97 percent of par. The second issue has a face value of $80 million, a coupon rate of 6 percent, and sells for 109 percent of par. The first issue matures in 23 years, the second in 6 years. Both bonds make semiannual coupon 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., .1616.)
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., .1616.)

Answer 1

1^st Issue of Bonds:

Book Value = $95,000,000

Market Value = 97% * $95,000,000
Market Value = $92,150,000

2^nd Issue of Bonds:

Book Value = $80,000,000

Market Value = 109% * $80,000,000
Market Value = $87,200,000

Equity:

Number of shares outstanding = 8,000,000
Book Value per share = $7.00
Market Price per share = $74

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

Market Value of Equity = Number of shares outstanding * Market Price per share
Market Value of Equity = 8,000,000 * $74
Market Value of Equity = $592,000,000

Answer a.

Book Value of Debt = Book Value of 1^st Issue of Bonds + Book Value of 2^nd Issue of Bonds
Book Value of Debt = $95,000,000 + $80,000,000
Book Value of Debt = $175,000,000

Book Value of Firm = Book Value of Debt + Book Value of Equity
Book Value of Firm = $175,000,000 + $56,000,000
Book Value of Firm = $231,000,000

Weight of Debt = Book Value of Debt / Book Value of Firm
Weight of Debt = $175,000,000 / $231,000,000
Weight of Debt = 0.7576 or 75.76%

Weight of Equity = Book Value of Equity / Book Value of Firm
Weight of Equity = $56,000,000 / $231,000,000
Weight of Equity = 0.2424 or 24.24%

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 = $92,150,000 + $87,200,000
Market Value of Debt = $179,350,000

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $179,350,000 + $592,000,000
Market Value of Firm = $771,350,000

Weight of Debt = Market Value of Debt / Market Value of Firm
Weight of Debt = $179,350,000 / $771,350,000
Weight of Debt = 0.2325 or 23.25%

Weight of Equity = Market Value of Equity / Market Value of Firm
Weight of Equity = $592,000,000 / $771,350,000
Weight of Equity = 0.7675 or 76.75%