Question

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $85, 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 $65 million, a coupon of 8 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon of 9 percent, and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 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.)

Answer 1

a) D/V = 68.63 %

E/V = 31.37 %

b) D/V = 17.07 %

E/V = 82.93 %

Step-by-step explanation:

book value:

equity:

6,000,000 x 8 = 48,000,000

liability:

23-years bonds: 65,000,000

5-years bonds: 40,000,000

total 105,000,000

Value: eqiuty + laibility: 105,000,000 + 48,000,000 = 153,000,000

book value Weights:

D 105,000,000 / 153,000,000 = 68.63

E 48,000,000 / 153,000,000 = 31.37

market value

equity:

6,000,000 x 85 = 510,000,000

liability:

23-years bonds:

65,000,000 x 95% = 61,750,000

5-years bonds:

40,000,000 x 108% = 43,200,000

total 104,950,000

Value: eqiuty + laibility: 510,000,000 + 104,950,000

Total Assets = $614,950,000

Market value Weights:

Debt = 104,950,000/614,950,000

Debt = 0.1707

Equity = 510,000,000/614,950,000

Equity = 0.8293