Question

Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $74, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, a coupon of 9 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, a coupon of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 8 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

Debt:

1^st Issue of Bonds:

Face Value = $80,000,000

Market Value = 95% * $80,000,000
Market Value = $76,000,000

2^nd Issue of Bonds:

Face Value = $60,000,000

Market Value = 108% * $60,000,000
Market Value = $64,800,000

Book Value of Debt = Book Value of 1^st Issue of Bonds + Book Value of 2^nd Issue of Bonds
Book Value of Debt = $80,000,000 + $60,000,000
Book Value of Debt = $140,000,000

Market Value of Debt = Market Value of 1^st Issue of Bonds + Market Value of 2^nd Issue of Bonds
Market Value of Debt = $76,000,000 + $64,800,000
Market Value of Debt = $140,800

Equity:

Number of Shares = 8,000,000
Book Value per share = $5
Current Price per share = $74

Book Value of Equity = Number of Shares * Book Value per share
Book Value of Equity = 8,000,000 * $5
Book Value of Equity = $40,000,000

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

Answer a.

Book Value of Firm = Book Value of Debt + Book Value of Equity
Book Value of Firm = $140,000,000 + $40,000,000
Book Value of Firm = $180,000,000

Equity/Value = Book Value of Equity / Book Value of Firm
Equity/Value = $40,000,000 / $180,000,000
Equity/Value = 0.2222

Debt/Value = Book Value of Debt / Book Value of Firm
Debt/Value = $140,000,000 / $180,000,000
Debt/Value = 0.7778

Answer b.

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $140,800,000 + $592,000,000
Market Value of Firm = $732,800,000

Equity/Value = Market Value of Equity / Market Value of Firm
Equity/Value = $592,000,000 / $732,800,000
Equity/Value = 0.8079

Debt/Value = Market Value of Debt / Market Value of Firm
Debt/Value = $140,800,000 / $732,800,000
Debt/Value = 0.1921

Answer c.

Market value weights are more relevant than book value weights as it represent current financial position of the firm.