Suppose that a company\'s equity is currently selling for $44.00 per share and t

Question

Suppose that a company's equity is currently selling for $44.00 per share and that there are 2.6 million shares outstanding and 36 thousand bonds outstanding, which are selling at 115.00 percent of par. If the firm was considering an active change to their capital structure so that the firm would have a D/E of 1.6, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell? (Round your intermediate ratio to 4 decimal places.) $40,005,680 in new debt $54,483,260 in new equity $54,483,260 in new debt $14,477,580 in new equity

Explanation / Answer

value of equity = 44*2600000 = 114.4 million

value of debt = 36000*115 = 41.4 million

current D/E = 41.4/114.4 = 0.3619

new amount of debt = 1.6/2.6 *( 114.4 + 41.4) = 95.8769

debt to be bought or equity to be sold = 95.8769 - 41.40 = 54.4769 million

ans: $54,483,260 in new equity

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