Question

Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $9. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, a coupon rate of 7 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, a coupon rate of 6 percent, and sells for 107 percent of par. The first issue matures in 25 years, the second in 8 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

Ans.

a)

Particulars	Book Value (Millions)	Weight (Amount / Total)
Common Stock	$           36.00	0.2105
First Bond Issue	$           75.00	0.4386
Second Bond Issue	$           60.00	0.3509
Total Book Value	$         171.00

A/1	B	C	D
2	Particulars	Book Value (Millions)	Weight (Amount / Total)
3	Common Stock	=4*9	=+C3/C6
4	First Bond Issue	75	=+C4/C6
5	Second Bond Issue	60	=+C5/C6
6	Total Book Value	=SUM(C3:C5)

Weight of Equity on Book Value Basis = 0.2105

Weight of Debt on Book Value Basis = 0.7895

b)

Particulars	Market Value (Millions)	Weight (Amount / Total)
Common Stock	$         280.00	0.6740
First Bond Issue	$           71.25	0.1715
Second Bond Issue	$           64.20	0.1545
Total Market Value	$         415.45

A/1	B	C	D
2	Particulars	Market Value (Millions)	Weight (Amount / Total)
3	Common Stock	=4*70	=+C3/C6
4	First Bond Issue	=75*95%	=+C4/C6
5	Second Bond Issue	=60*107%	=+C5/C6
6	Total Market Value	=SUM(C3:C5)

Weight of Equity on Book Value Basis = 0.6740

Weight of Debt on Book Value Basis = 0.3260