Question

If the firm also has 30 thousand bonds outstanding, which are selling at 103 ... Equity is currently selling for $55 per share, with 4 million shares outstanding. If the firm also has 17 thousand bonds outstanding, which are selling at 94 percent of par, ... If lil john was considering an active change to their capital structure so that ...

Answer 1

0000.9417,000$1,0000.946.77%4,000,000$5517,000$1,0000.94EEDDED×==+×+××××==+×+××16-14Restructuring StrategySuppose that Lil John Industries’ equity is currently selling for $27 per share and that there are 2 million shares outstanding. The firm also has 50 thousand bonds outstanding, which are selling at 103 percent of par. If Lil John was considering an active change to their capital structure so that the firm would have a D/E of 1.4, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell? (LG1)Using the capital structure weights formulas from chapter 11, the current capital weights are:2,000,000$270.5118 or 51.18%2,000,000$2750,000$1,0001.0350,000$1,0001.030.4882 or 48.82%2,000,000$2750,000$1,0001.03EEDDED×==+×+××××==+×+××The current D/E ratio is 0.4882 / 0.5118 = 0.9537, so Lil John would be contemplating increasing the D/E ratio. To do so, they would have to change their debt ratio to 1.4 / 2.4 = 0.5833, which would require issuing (0.5833 - 0.4882) × [($2,000,000 × $27) + (50,000 × $1,000 × 1.03)] = $10,041,666.67 of new debt and using the proceeds to repurchase stock.16-14Capital Structure WeightsSuppose that Papa Bell, Inc.’s, equity is currently selling for $45 per share, with 4 million shares outstanding. The firm also has 7 thousand bonds outstanding, which are selling at 94 percent of par. If Papa Bell was considering an active change to their capital structure so as to have a D/E of 0.4, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell? (LG1)Using the capital structure weights formulas from chapter 11, the current capital weights are:4,000,000$4596.47%4,000,000$457,000$1,0000.947,000$1,0000.943.53%4,000,000$457,000$1,0000.94EEDDED×==+×+××××==+×+××The current D/E ratio is 0.0353 / 0.9647 = 0.0366, so Lil John would be contemplating increasing the D/E ratio. To do so, they would have to change their debt ratio to 0.4 / 1.4 = 0.2857, which would require issuing (0.2857 - 0.0353) × [($4,000,000 × $45) + (7,000 × $1,000 × 0.94)] = $46,728,571.43 of new debt and using the proceeds to repurchase stock.