Question

Problem 14-12 Book Value versus Market Value [LO3] Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $76, and the book value per share is $7. The company also has two bond issues outstanding. The first bond issue has a face value of $105 million, a coupon rate of 5 percent, and sells for 95 percent of par. The second issue has a face value of $90 million, a coupon rate of 4 percent, and sells for 107 percent of par. The first issue matures in 25 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.) c. Which are more relevant, the book or market value weights? Market value

Answer 1

Answer:

a. What are the company's capital structure weights on a book value basis?

common stocks' book value = 4,000,000 x $7 = $28,000,000

first bond = $105,000,000

second bond = $90,000,000

total book value = $223,000,000

capital structure:

common stocks = $28 / $223 = 0.1256

debt = $195 / $223 = 0.8744

b. What are the company’s capital structure weights on a market value basis?

common stocks' market value = 4,000,000 x $76 = $304,000,000

first bond = $99,750,000

second bond = $96,300,000

total book value = $500,050,000

capital structure:

common stocks = $304 / $500.05 = 0.6079

debt = $196.05 / $500.05 = 0.3921

c. Which are more relevant, the book or market value weights?

The market value is always more relevant and it is used to calculate the company's WACC.