Question

S14-12 Book Value versus Market Value [LO3] 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

Answer 1

A. .6627

B. .1892

Step-by-step explanation:

A. Calculation to determine the company's capital structure weights on a book value basis

First step is to calculate the book value weights of equity

Book value weights of equity = $7,000,000($8)

Book value weights of equity = $56,000,000

Second step is to calculate the Book value weights of debt

Book value weights of debt = $70,000,000 + 40,000,000

Book value weights of debt = $110,000,000

Third step is to calculate the total value of the company

Total value = $56,000,000 + 110,000,000

Total value = $166,000,000

Fourth step is to calculate the book value weights of equity and debt

Book value weights of equity and debt = $56,000,000/$166,000,000

Book value weights of equity and debt = .3373

Now let calculate capital structure weights on a book value basis using this formula

Capital structure weights on a book value basis= 1 - Book value weights of equity and debt

Let plug in the formula

Capital structure weights on a book value basis=1-.3373

Capital structure weights on a book value basis= .6627

Therefore the company's capital structure weights on a book value basis is .6627

B. Calculation to determine the company's capital structure weights on a market value basis

First step is to calculate the Market Value of Equity

Market Value of Equity = 7,000,000($68)

Market Value of Equity = $476,000,000

Second step is to calculate the Market Value of debt

Market Value of debt = .97($70,000,000) + 1.08($40,000,000)

Market Value of debt = $111,100,000

Third step is to calculate the total market value of the company

Total market value = $476,000,000 + 111,100,000

Total market value = $587,100,000

Fourth Step is to calculate the market value weights of equity and debt

Market value weights of equity and debt = $476,000,000/$587,100,000

Market value weights of equity and debt = .8108

Now let calculate capital structure weights on a market value basis

Using this formula

Capital structure weights on a market value basis = 1 - Market value weights of equity and debt

Let plug in the formula

Capital structure weights on a market value basis =1-.8108

capital structure weights on a market value basis = .1892

Therefore the company's capital structure weights on a market value basis is .1892