Question

Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $67, 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 $60 million, a coupon rate of 7 percent, and sells for 92 percent of par. The second issue has a face value of $45 million, a coupon rate of 6 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

Answer 1

Answer:

The company's capital structure weights on a book value basis are:

a. 28.57% for equity, and

b. 71.43% for debt.

Explanation:

Book value of equity = 7,000,000 * $6 = $42,000,000

Book value of debts = $60,000,000 + $45,000,000  = $105,000,000

Dinklage Corp.'s total value = $42,000,000 + $105,000,000  = $147,000,000

Book value weights of equity = $42,000,000 / $147,000,000 = 0.2857, or 28.57%

Book value weights of debt = = 1 - 0.2857 = 0.7143, or 71.43%

Therefore, the company's capital structure weights on a book value basis are 28.57% for equity and 71.43% for debt.