Question

Dinklage Corp. has 9 million shares of common stock outstanding. The current share price is $75, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $100 million, a coupon rate of 4 percent, and sells for 96 percent of par. The second issue has a face value of $85 million, a coupon rate of 3 percent, and sells for 108 percent of par. The first issue matures in 24 years, the second in 7 years. Both bonds make semiannual coupon 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., .1616.)
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., .1616.)

a.

Equity/value:

Debt/value:

b.

equity/value:

debt/value:

   

Answer 1

(a)	Equity / Value	0.2259
	Debt / Value	0.7741
(b)	Equity / Value	0.7823
	Debt / Value	0.2177

Company's capital structure weights on a book value basis

Book Value of Common Stock = $540,00,000 [90,00,000 x $6]

Book Value of Debt = $18,50,00,000 [$10,00,00,000 + 8,50,00,000]

Total Book Value = $23,90,00,000

Capital structure weights of Common Stock = 0.2259 [$5,40,00,000 / 23,90,00,000]

Capital structure weights of Debt = 0.7741 [$18,50,00,000 / 23,90,00,000]

(b)-Company’s capital structure weights on a market value basis

Market Value of Common Stock = $ 67,50,00,000 [90,00,000 x $75]

Market Value of Debt = $ 18,78,00,000 [($10,00,00,000 x 0.96) + (8,50,00,000 x 1.08)]

Total Market Value = $ 86,28,00,000

Capital structure weights of Common Stock = 0.7823 [$67,50,00,000 / 86,28,00,000]

Capital structure weights of Debt = 0.2177 [$18,78,00,000 / 86,28,00,000]