Dinklage Corp. has 8 million shares of common stock outstanding. The current share price is $82, 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 $135 million, a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $120 million, a coupon rate of 6 percent, and sells for 102 percent of par. The first issue matures in 25 years, the second in 9 years. Both bonds make semiannual coupon payments.

Required:

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 companyâs capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.)

Respuesta :

Answer:

a. The company's capital structure weights on a book value basis is that the Equity/Value is 0.1584  and the Debt/Value is 0.8416

b. tTe company's capital structure weights on a market value basis is that the Equity/Value is 0.7257  and the Debt/Value is 0.2743

Explanation:

a. According to the given data we have the following:

Book Value of first bond = $135  million

Book Value of second bond = $120  million

Book Value of shares = 8*6 = 48

Therefore, in order to calculate the company's capital structure weights on a book value basis we would have to make the following calculations:

Weight of equity = 48/($135+$120+48) = 0.1584

Weight of debt = ($135+$120)/($135+$120+48) = 0.8416

b. In order to calculate the companyâs capital structure weights on a market value basis, we would have to calculate first the Market Value of first bond and the Book Value of second bond as follows

Market Value of first bond = $135*93% = $125.55  millions

Book Value of second bond = $120* 102% = $122.4  millions

Market Value of shares = 8*82 = 656

Therefore, Weight of equity = 656/(656 +125.55 +122.4) = 0.7257

Weight of debt = (125.55+122.4)/(656 +125.55 +122.4)) = 0.2743