e to RefWorks E connect FINANCE pter 14 Homework Questior va

e to RefWorks E connect FINANCE pter 14 Homework Questior value 10.00 points Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $72, 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 $70 million, a coupon of 7 percent, and sells for 97 percent of par. The second issue has a face value of S50 million, a coupon of 8 percent, and sells for 106 percent of par. The first issue matures in 22 years, the second in 6 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.) 0.7813 0.2187 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.) quity DebtValue c. Which are more relevant, the book or market value weights? O Market value O Book value Hints References eBook & Resources Hint#1

Solution

Answer a.

Equity:

Number of shares outstanding = 6,000,000
Book value per share = $7

Book Value of Equity = Number of shares outstanding * Book value per share
Book Value of Equity = 6,000,000 * $7
Book Value of Equity = $42,000,000

Debt:

1^st Issue of Bond:

Face Value = $70,000,000

2^nd Issue of Bond:

Face Value = $50,000,000

Book Value of Debt = Face Value of 1^st Issue of Bond + Face Value of 2^nd Issue of Bond
Book Value of Debt = $70,000,000 + $50,000,000
Book Value of Debt = $120,000,000

Book Value of Firm = Book Value of Debt + Book Value of Equity
Book Value of Firm = $120,000,000 + $42,000,000
Book Value of Firm = $162,000,000

Equity/Value = Book Value of Equity / Book Value of Firm
Equity/Value = $42,000,000 / $162,000,000
Equity/Value = 0.2593

Debt/Value = Book Value of Debt / Book Value of Firm
Debt/Value = $120,000,000 / $162,000,000
Debt/Value = 0.7407

Answer 2.

Equity:

Number of shares outstanding = 6,000,000
Market value per share = $72

Market Value of Equity = Number of shares outstanding * Market value per share
Market Value of Equity = 6,000,000 * $72
Market Value of Equity = $432,000,000

Debt:

1^st Issue of Bond:

Face Value = $70,000,000

Market Value = 97% * $70,000,000
Market Value = $67,900,000

2^nd Issue of Bond:

Face Value = $50,000,000

Market Value = 106% * $50,000,000
Market Value = $53,000,000

Market Value of Debt = Market Value of 1^st Issue of Bond + Market Value of 2^nd Issue of Bond
Market Value of Debt = $67,900,000 + $53,000,000
Market Value of Debt = $120,900,000

Market Value of Firm = Market Value of Debt + Market Value of Equity
Market Value of Firm = $120,900,000 + $432,000,000
Market Value of Firm = $552,900,000

Equity/Value = Market Value of Equity / Market Value of Firm
Equity/Value = $432,000,000 / $552,900,000
Equity/Value = 0.7813

Debt/Value = Market Value of Debt / Market Value of Firm
Debt/Value = $120,900,000 / $552,900,000
Debt/Value = 0.2187

Answer c.

Market value are more relevant than book value.