The answers to the questions are given below.
A. The company's capital structure weights on a book value basis are:
B. The company's capital structure weights on a market value basis are:
A. The company's capital structure weights on a book value basis are:
Firm's Outstanding common stock = 6 million shares
Current share price = $84
Book value per share = $5
Hence, Total equity book value = $30 million (6,000,000 x $5)
Total equity market value = $504 million (6,000,000 x $84)
First bond's face value = $145 million
Coupon rate = 5%
Selling price = 95% of par
Market value of first bond = $145 x 95%
= $137.75 million
The Second bond's face value = $130 million
Coupon rate = 4%
Market value = $130 x 107% = $139.1 million
Total market value of bonds = $276.85 million ($137.75 + $139.1)
Book value of bonds = $275 million ($145 + $130)
Therefore, the company's capital structure by book value:
Equity = $30 million
Debt = $275 million
So, Total firm's value = $305 million
Hence:
Equity = $30/$305 x 100 = 9.84%
Debt = $275/$305 x 100 = 90.16%
B. Hence company's capital structure by market value:
Equity = $504 million
Debt = $276.85 million
Total firm's value = $780.85 million
Therefore:
Equity = $504/$780.85 x 100 = 64.55%
Debt = $276.85/$780.85 x 100 = 35.45%
See full question below
Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $84, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $145 million, a coupon rate of 5 percent, and sells for 95 percent of par. The second issue has a face value of $130 million, a coupon rate of 4 percent, and sells for 107 percent of par. The first issue matures in 24 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?
b. What are the company's capital structure weights on a market value basis?
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