Question

Suppose that Lil John Industries’ equity is currently selling for $29 per share and that 1.2...

Suppose that Lil John Industries’ equity is currently selling for $29 per share and that 1.2 million shares are outstanding. Assume the firm also has 22,000 bonds outstanding, and they are selling at 103 percent of par. What are the firm’s current capital structure weights?

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Answer #1

Value of Equity = Number of shares outstanding x Selling price per share

= $12,00,000 shares x $29 per share

= $3,48,00,000

Value of Debt = Number of Bonds outstanding x Selling price of the bond

= 22,000 Bonds x ($1,000 x 103%)

= $2,26,60,000

Total Value = Value of Equity + Value of Debt

= $3,48,00,000 + $2,26,60,000

= $ 5,74,60,000

Capital Structure Weights

Weight of Equity = [Value of Equity / Total Value] x 100

= [$3,48,00,000 / 5,74,60,000] x 100

= 60.56%

Weight of Debt = [Value of Debt / Total Value] x 100

= [$2,26,60,000 / 5,74,60,000] x 100

= 39.44%

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