Question

papa bell, Inc’s Equity is currently selling for $43 per share, with 3.8 shares outstanding. The firm also has 9000 bonds outstanding, which are selling at 93 percent of par. Assume papa bell was considering an active change to its capital structure so as to have a D/E .3. Therefore what is the selling amount? Answer please NOT in millions only dollars and only round the answer to two decimal points

Answer 1

Solution:

Given data,

Equity is currently selling for $43 per share,

with 3.8 shares outstanding,

The firm also has 9000 bonds outstanding,

which are selling at 93 percent of par.

Now, we find values for given question.

The current capital weights are:

E = $43 x 3,800,000 = $163,400,000

D = 9000 x $1000 x 0.93= $83,70,000

(E + D) = $171,770,000

Equity = E / E+D = 0.9512

Debt = D / E+D = 0.0487

And the current D/E is 0.0487 / 0.9512 = 0.0511

Since, Papa Bell was considering an active change to its capital structure so as to have a D/E of 0.3, so they have to increase its ratio.

To do so, they would have to change their debt ratio to 0.3 /1.3 = 0.2307

And this would require selling bonds and then using the proceeds to buy back stocks!

This would require selling:

= (0.2307-0.0511) x ($171,770,000)

=$30,849,892.00

The selling amount

$30,849,892.00