Question

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $89, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $85 million, a coupon of 6 percent, and sells for 96 percent of par. The second issue has a face value of $60 million, a coupon of 7 percent, and sells for 109 percent of par. The first issue matures in 21 years, the second in 9 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

Answer 1

Answer: The book value of equity is the book value per share times the number of shares, and the book value of debt is the face value of the company's debt, so:

BVE = 6,000,000($8) = $48,000,000

BVD = $85,000,000 + 60,000,000 = $145,000,000

So, the total value of the company is: V = $48,000,000 + $145,000,000 = $193,000,000

And the book value weights of equity and debt are: E/V = $48,000,000/$193,000,000 = 0.2487

D/V = 1 - E/V = 0.7513

2. The market value of equity is the share price times the number of shares, so:

MVE = 6,000,000($89) = $534,000,000

Using the relationship that the total market value of debt is the price quote times the par value of the bond, we find the market value of debt is:

MVD = .96($85,000,000) + 1.09($60,000,000) = $147,000,000

This makes the total market value of the company:

V = $534,000,000 + 147,000,000 = $681,000,000

And the market value weights of equity and debt are:

E/V = $534,000,000/$681,000,000 = .7841

D/V = 1 - E/V = .2159

The market value weights are more relevant.