Question

Suppose that a company's equity is currently selling for $23.50 per share and that there are 4.60 million shares outstanding. If the firm also has 36 thousand bonds outstanding, which are selling at 104.00 percent of par, what are the firm's current capital structure weights for equity and debt respectively?

A. 74.28%, 25.72%

B. 22.60%, 77.40%

C. 50%, 50%

D. 65.37% 34.63%

Answer 1

The correct answer is A. 74.28%, 25.72%

Calculation of Firm's Current Capital Structure weights for equity and debt

Step 1 - Calculation of Current Market Value of Equity

Number of Shares outstanding * Current Share Price

= 4.60 * 1,000,000 * 23.50

= $108,100,000

Step 2 - Calculation of Current Market Value of Debt

Par value of corporate bonds are usually $1000

Therefore 104% of $1000

= $1040

Number of bonds outstanding * Current Selling price

36 * 1000 * 1040

$37,440,000

Step 3 - Total market value of debt and equity

= Market value of equity + Market value of debt

=$108,100,000 + $37,440,000

= $145,540,000

Step 4 - Calculation of Weights

Weight of Equity = Market value of equity / Total market value of debt and equity

= $108,100,000 / $145,540,000

= 0.7428 or 74.28%

Weight of debt = Market value of debt / Total market value of debt and equity

= $37,440,000 / $145,540,000

= 0.2572 or 25.72%

Therefore the correct answer is A - 74.28%, 25.72%