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

Complete the following analysis. Do not hard code values in your calculations, and do not round intermediate calculations.

Current Equity Ratio:

Current Debt Ratio:

Current D/E Ratio:

Sell Bonds or Stock?:

New Debt Ratio:

Amount of Securities to Buy and Sell:

I found this question in Chegg study; however, all calculations is done manually and I need to know how to entered it in a spreadsheet that is provide it.

Answer 1

Answer:- As given that,

Equity Value = 3.6*41 = 147.6m

Debt Value = 1000*95%*8000 = 7600000 = 7.6m

Total Liabilities = 147.6+7.6m = 155.2m

Current Equity Ratio = Equity Value/Total Liabilities = 147.6/155.2 = 0.95:1

Current debt ratio = Debt Value/Total Liabilities = 7.6/155.2 = 0.05:1

Current Debt/Equity Ratio = Debt/Equity = 7.6/147.6 = 0.0515:1

Proposed debt/Equity Ratio = 0.5:1

Therefore Proposed debt = 0.5*Total Liabilities = 0.5*155.2 = 77.6m

Existing debt = 7.6m

So, Debt have to be increased by = 77.6-7.6 = 70m

So, Bonds have to bought & Hence shares have to be sold

Number of share to be sold = 70m/41 = 1707317.07 shares

Therefore Number of shares to be sold = 1707317.07