Question

Dinklage Corp. has 5 million shares of common stock outstanding. The current share price is $71, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $65 million, a coupon of 6 percent, and sells for 96 percent of par. The second issue has a face value of $45 million, a coupon of 7 percent, and sells for 105 percent of par. The first issue matures in 21 years, the second in 5 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

a)

Book value of shares = 5,000,000 * 6 = 30,000,000

Book value of bond 1 = 65,000,000

Book value of bond 2 = 45,000,000

Total book value of bond = 65,000,000 + 45,000,000 = 110,000,000

Total book value of capital = 30,000,000 + 110,000,000 = 140,000,000

Equity/value = 30,000,000 / 140,000,000 = 0.2143

Debt/value = 110,000,000 / 140,000,000 = 0.7857

b)

Market value of shares = 5,000,000 * 71 = 355,000,000

Market value of bond 1 = 96% of 65,000,000 = 62,400,000

Market value of bond 2 = 105% of 45,000,000 = 47,250,000

Total Market value of bond = 62,400,000 + 47,250,000 = 109,650,000

Total Market value of capital = 355,000,000 + 109,650,000 = 464,650,000

Equity/value = 355,000,000 / 464,650,000 = 0.7640

Debt/value = 109,650,000 / 464,650,000 = 0.2360

c)

Market value is more relevant