Question

Suppose that a company's equity is currently selling for $26.00 per share and that there are 5.60 million shares outstanding. If the firm also has 46 thousand bonds outstanding, which are selling at 109.00 percent of par, what are the firm's current capital structure weights for equity and debt respectively?

Equity = 5,600,000 x $26 = $145,600,000, so .7438

Debt = 46,000 x 1.090 x 1,000 = $50,140,000, so .2562

Total = $195,740,000

74.38%, 25.62%

Answer 1

SOLUTION:

From given data,

Suppose that a company's equity is currently selling for $26.00 per share and that there are 5.60 million shares outstanding. If the firm also has 46 thousand bonds outstanding, which are selling at 109.00 percent of par, what are the firm's current capital structure weights for equity and debt respectively?

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

Where,

Step 1 - Calculation of Current Market Value of Equity

Value of Equality = Each share price * No. of shares outstanding

Equity = 5,600,000 x $26 = $145,600,000, so .7438

Step 2 - Calculation of Current Market Value of Debt

Value of Debt = No.of Bonds* Par Value of Bond Selling at % of Par*Par Value is assumed as $ 1000

Debt = 46,000 x 1.090 x 1,000 = $50,140,000, so .2562

Total = $195,740,000

Weight of Equity = Value of Equity / (Value of Equity + Value of Debt)

Weight of Equity = $145,600,000 / ($145,600,000 + $50,140,000,)

Weight of Equity = 0.7438 i.e 74.38%

Weight of debt = 1 - weight of equity

= 1 - 0.7438

= 0.2562 i.e 25.62%

Therefore the correct answer is Answers are 74.38%, 25.62%.