Question

Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $68, 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 $70 million, a coupon rate of 6 percent, and sells for 97 percent of par. The second issue has a face value of $40 million, a coupon rate of 6.5 percent, and sells for 108 percent of par. The first issue matures in 21 years, the second in 6 years. Both bonds make semiannual payments.

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., .3216.)
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., .3216.)

  
   

c.	Which are more relevant, the book or market value weights?
	Market value Book value

Answer 1

a. The company's capital structure weight on a book value basis is computed as shown below:

Total book value of equity is computed as shown below:

= 7 million shares x $ 8

= $ 56 million

Total book value of debt is computed as shown below:

= Face value of first bond + Face value of second bond

= $ 70 million + $ 40 million

= $ 110 million

So, the book value weight of equity will be as follows:

= $ 56 million / ( $ 56 million + $ 110 million)

= 0.3373 Approximately

So, the book value weight of debt will be as follows:

= 1 - 0.3373

= 0.6627 Approximately

b. The company's capital structure weight on a market value basis is computed as shown below:

Total market value of equity is computed as shown below:

= 7 million shares x $ 68

= $ 476 million

Total market value of debt is computed as shown below:

= value of first bond + value of second bond

= $ 70 million x 0.97 + $ 40 million x 1.08

= $ 111.10 million

So, the market value weight of equity will be as follows:

= $ 476 million / ( $ 476 million + $ 111.10 million)

= 0.8108 Approximately

So, the market value weight of debt will be as follows:

= 1 - 0.8108

= 0.1892 Approximately

c. The market weights are more relevant since they reflects the position of current prices undergoing in the market.

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