Question

Suppose that shares in Tasty Bites Pizza, Inc., are trading for $46 per share, with 6 million shares outstanding. If the firm also has 12,000 bonds outstanding and they're selling at 97 percent of par, what are the firm's current capital structure weights?

A. Equity 14.85 percent; debt 85.15 percent

B. Equity 4.05 percent; debt 95.95 percent

C. Equity 95.78 percent; debt 4.05 percent

D. Equity 85.15 percent; debt 14.85 percent

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=46*6000000

=276000000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*12000*0.97

=11640000

MV of firm = MV of Equity + MV of Bond

=276000000+11640000

=287640000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 276000000/287640000

W(E)=0.9595

Weight of debt = MV of Bond/MV of firm

Weight of debt = 11640000/287640000

W(D)=0.0405

C is correct