Question

Dinklage Corp. has 10.1 million shares of common stock outstanding. The current share price is $58, 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, has a 7 percent coupon, and sells for 91 percent of par. The second issue has a face value of $64.64 million, has a 7 percent coupon, and sells for 94.1 percent of par. The first issue matures in 10 years, the second in 7 years.

a. What is the company's capital structure weight of equity on a book value basis?

b. What is the company's capital structure weight of debt on a book value basis?

c. What is the company's capital structure weight of equity on a market value basis?

d. What is the company's capital structure weight of debt on a market value basis?

Answer 1

Book Value :

Equity = 10.1 Million * $ 5

1st Bond : $ 80 Million

2nd Bond = $ 64.64 Million

Total Bond Value = $ 80 Million+ $ 64.64 Million

Total Value of Firm = $ 80 Million+ $ 64.64 Million +10.1 Million * $ 5

a. Weight of Equity = Value of Equity / Total Value of Firm

=25.88%

b. Weight of Debt = Value of Debt /Total Value of Firm

= 74.12%

Note:

		Weight ( Value / Total)
Equity	50500000	25.88
Debt	144640000	74.12
	195140000

Market Value:

Equity = 10.1 Million * $ 58

1st Bond : $ 80 Million * 91%

2nd Bond = $ 64.64 Million * 94.1%

Total Bond Value = $ 80 Million* 91%+ ($ 64.64 Million * 94.1%)

Total Value of Firm = $ 80 Million* 91%+ ($ 64.64 Million * 94.1%)+ (10.1 Million * $ 58)

c. Weight of Equity = Value of Equity / Total Value of Firm

= 81.43%

d. Weight of Debt = Value of Debt /Total Value of Firm

= 18.57%

		Weight ( Value / Total)
Equity	585800000	81.43
Debt	133626240	18.57
	719426240