Suppose that Lil John Industries\' equity is currently selling for $32 per share

ID: 2795481 • Letter: S

Question

Suppose that Lil John Industries' equity is currently selling for $32 per share and that 2.5 million shares are outstanding. The firm also has 55,000 bonds outstanding, which are selling at 104 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 1.3 Which type of security (stocks or bonds) would it need to sell to accomplish this? 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.)

Explanation / Answer

Current Position:

Particular

Amount $

Equity (32*2500000)

80000000

Bonds (55000*100)*104%

5720000

Debt/Equity Ratio (Bond/Equity)

0.0715

Desired D/E=1.3

Debt/80000000=1.3

Debt=800,00,000*1.3

Debt=1040,00,000

Current Debt (bonds)=57,20000

New bonds need to be issued: (1040,00000-5720000)= $982,80000

Thanks