Question

Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $80, 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 $75 million, a coupon of 9 percent, and sells for 95 percent of par. The second issue has a face value of $45 million, a coupon of 10 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 7 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

a.

MV of equity=Price of equity*number of shares outstanding

MV of equity=7*8000000

=56000000

MV of Bond1=Par value*bonds outstanding*%age of par

MV of Bond1=1000*75000*1

=75000000

MV of Bond2=Par value*bonds outstanding*%age of par

MV of Bond2=1000*45000*1

=45000000

MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2

=56000000+75000000+45000000

=176000000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 56000000/176000000

W(E)=0.3182

Weight of debt = MV of Bond/MV of firm

Weight of debt = 120000000/176000000

W(D)=0.6818

b.

MV of equity=Price of equity*number of shares outstanding

MV of equity=80*8000000

=640000000

MV of Bond1=Par value*bonds outstanding*%age of par

MV of Bond1=1000*75000*0.95

=71250000

MV of Bond2=Par value*bonds outstanding*%age of par

MV of Bond2=1000*45000*1.08

=48600000

MV of firm = MV of Equity + MV of Bond1+ MV of Bond 2

=640000000+71250000+48600000

=759850000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 640000000/759850000

W(E)=0.8423

Weight of debt = MV of Bond/MV of firm

Weight of debt = 119850000/759850000

W(D)=0.1577