Question

Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $60 million, a coupon of 5 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 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
c. Which are more relevant, the book or market value weights? Market value Book value

Answer 1

Answer:a. Capital structure weights in book value

Debt weight = Total debt in book value divided by total debt and equity in book value.

$ 100m/$120m=83.3333

Equity weight= Total equity in book value divided by total debt and equity in book value.

$ 20m/$120m= 16.6667

b. Capital structure weights in market value.

Debt weight, is total debit at market value divided by total value of debt and equity in market value

$ 98.6m/$378.6m=26.0433

Equity weight is total equity at market value divided by total of debt and equity at market value.

$280m/$378.6m= 73.9567

C. The market value is more relevant in relation to the continuous existence of the firm it's the basis that determines is performance, share premium etc however the book value is more relevant on liquidation because it's the value at which the equity and debt holders are settled.