Question

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $72, 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 $70 million, a coupon of 7 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, a coupon of 8 percent, and sells for 106 percent of par. The first issue matures in 22 years, the second in 6 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 or Book value?

Answer 1

Based on book Values
Component	Price	No	Capital	Weight
First Bond			70.00	43.21%
Second bond			50.00	30.86%
Equity	7	6	42.00	25.93%
			162.00
Based on Market Values
Component	Price	No	Capital	Weight
First Bond			67.90	12.28%
Second bond			53.00	9.59%
Equity	72	6	432.00	78.13%
			552.90
Market Value based weights are more relevant because these reflects the investor expectation as compared to the book values