Question

Suppose that Papa Bell, Inc.'s, equity is currently selling for $41 per share, with 3.6 million shares outstanding. The firm also has 8,000 bonds outstanding, which are selling at 95% of par. Assume Papa Bell was considering an active change to its capital structure so as to have a D/E of 0.5. Which type of security (stocks or bonds) would the firm need to sell to accomplish this? How much would it have to sell? (Enter your answer in dollars not in millions. Do not round intermediate calculations and round your final answer to 2 decimal places.) Share Price: $41.00 Shares Outstanding: 3,600,000 Bonds Outstanding: 8,000 Bond Price (% of Par): 95% Proposed New D/E Ratio: 0.50. I need to know how to entered this exactly on the spreadsheet. Thank you!

Answer 1

If Papa Bell have to maintain same capital, butr different structure they will need to sell shares and issue bonds worth the same amount.

The total capital is 155,200,000. out of which Equity is 95.10% & Debt is 4.90%

Desired weight is 1/2 or Debt = 1/3 = 33.33% & Equity is 2/3 = 66.67%

Firm will sell equity to bring it down to 66.67% of capital = 103,466,667 and issue bonds worth the same value.

So 1076423 shares would be sold & 46456 additional bonds would be issued.

Capital Component	Units	Price/ Unit	Value	Weights	Desired Weight	Desired Value	Desired Numbers	Numbers to be purchased/ Sold
Equity	3,600,000	41	147,600,000	95.10%	66.67%	103,466,667	2,523,577	1,076,423
Bonds	8,000	950	7,600,000	4.90%	33.33%	51,733,333	54,456	46,456
	Total		155,200,000			155,200,000