Question

Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $87, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, a coupon of 10 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon of 11 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 years. 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., 32.1616.) Equity/Value Debt/Value 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., 32.1616.) Equity/Value Debt/Value c. Which are more relevant, the book or market value weights? Market value/Book value

Answer 1

Answer :

(a.) Company's capital structure weights on a book value basis :

Book Value of Equity = Number of shares outstanding * Book Value per share

= 8 million * 6

= 48 million

Book Value of Debt = Book Debt Value of First Bond + Book Debt Value of second Bond

= 75 million + 50 million

= 125 million

Total Book Value = Book Value of Equity + Book Value of Debt

= 48 million + 125 million

= 173 million

Equity / Value = Book Value of Equity / Total Book Value

= 48 / 173

= 0.2775

Debt / Value = Book Value of Debt / Total Book Value

= 125 / 173

= 0.7225

(b.) Company's capital structure weights on a market value basis :

Market Value of Equity = Number of shares outstanding * Current share Price

= 8 million * 87

= 696 million

Market Value of Debt = (Book Debt Value of First Bond * 97%) + (Book Debt Value of second Bond * 105%)

= (75 million * 97%) + (50 million * 105%)

= 125.25 million

Total Market Value = Market Value of Equity + Market Value of Debt

= 696 million + 125.25 million

= 821.25 million

Equity / Value = Market Value of Equity / Total Market Value

= 696 / 821.25

= 0.8475

Debt / Value = Market Value of Debt / Total Market Value

= 125.25 / 821.25

= 0.1525

(c.) Market value weights are more relevant because they represent the true weights of company capital structure.