Question

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $78, and the book value per share is $9. The company also has two bond issues outstanding. The first bond issue has a face value of $115 million, a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $100 million, a coupon rate of 6 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 8 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

Answer:

Book value weight of equity is  0.2007  

Book value weight of debt is  0.7993  

Market value weight of equity is  0.6883  

Market value weight of debt is 0.3117  

Explanation:

The book value of the two bonds=$115 million+$100 million=$215 million

The book value of equity =6 million *$9=$54 million

weight of debt=$215/($215+$54)= 0.7993  

weight of equity=$54/($215+$54)= 0.2007  

Market value approach:

market value of equity=6 million*$78=$468  million

market of the first bond=$115 million*93%=$106.95  million

market value of the  second bond=$100 million*105%=$105 million

total market value of bonds=$106.95 million+$105 million=$ 211.95 million

weight of debt=$211.95/($211.95+$468 )= 0.3117  

weight of equity=$468/($211.95+$468 )= 0.6883