Suppose that Lil John Industries' equity is currently selling for $36 per share and that 1.9 million shares are outstanding. Assume the form also has 29,000 bonds outstanding, and they are selling at 104 percent of par.
What are the firm's current capital structure weights? (Do not round intermediate calculations. Round your answers to 2 decimals places.)
| Capital Structure Weights | |
| Equity | ?????? % |
| Debt | ?????? % |
Suppose that Lil John Industries’ equity is currently selling
for $28 per share and that 2.1 million shares are outstanding. The
firm also has 51,000 bonds outstanding, which are selling at 102
percent of par. Assume Lil John was considering an active change to
its capital structure so that the firm would have a (D/E) of
1.5.
Which type of security (stocks or bonds) would it need to
sell to accomplish this?
_____ sell bonds and buy back stock
_____ sell stocks and buy back bonds
How much would the firm 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.)
| Selling amount | ?????? |
1.
| Type | Number | Current price | Number * Price | Weights |
| Equity | 1,900,000 | 36 | 68400000 | 69.40% |
| Bonds | 29000 | 1040 | 30160000 | 30.60% |
| Total | 98560000 |
2. Current debt/ equity ratio = 30160000 / 68400000 = 0.4409
Hence the company will have to sell bonds and buy back stock to make the debt equity ratio 1.5.
3. Current debt ratio = 30160000 / 98560000 = 0.306
Target debt ratio = 1.5 / (1+1.5) = 0.6
Debt to be sold = (0.6 - 0.4409) * 98560000 = 15,677,380.12
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