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Dinklage Corp has 7 million shares of common stock outstanding

Finance Dec 01, 2020

Dinklage Corp has 7 million shares of common stock outstanding. The current share price is $79, and the book value per share is $10. The company also has two bond issues outstanding. The first bond issue has a face value of $120 million, a coupon rate of 4 percent, and sells for 92 percent of par. The second issue has a face value of $105 million, a coupon rate of 3 percent, and sells for 104 percent of par. The first issue matures in 22 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

Expert Solution

Answer : (a.) Calculation of Weights on the basis of Book Value :

Book Value of Equity = Number of shares * Book Value per share

= 7 million * 10

= 70 million

Book Value of Debt = Value of Debt 1 + Value of Debt 2

= 120 million + 105 million

= 225 million

Total Value = Book Value of Equity + Book Value of Debt

= 70 million + 225 million

= 295

Equity / Value = 70 / 295 = 0.2373

Debt / Value = 225 / 295 = 0.7627

(b.)

Calculation of Weights on the basis of Market Value :

Market Value of Equity = Number of shares * Market Value per share

= 7 million * 79

= 553 million

Market Value of Debt = Value of Debt 1 + Value of Debt 2

= (120 million * 92%) + (105 million * 104%)

= 219.6 million

Total Value = Market Value of Equity + Market Value of Debt

= 553 million + 219.6 million

= 772.6

Equity / Value = 553 / 772.6 = 0.7158

Debt / Value = 219.6 / 772.6 = 0.2842

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