Question

Suppose that a company's equity is currently selling for $28.25 per share and that there are 4.7 million shares outstanding and 27 thousand bonds outstanding, which are selling at 100 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 1.7, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell

Answer 1

Debt would be issued

amount of debt issuance is $ 198,717,500.00

Step-by-step explanation:

Target capital structure is Debt/Equity=1.7

Current capital structure=debt value/equity value

equity value=$28.25*4,700,000=$132,775,000.00

debt value=27,000*$1000=$27,000,000

Current D/E=$27,000,000/$132,775,000= 0.20

This implies that debt would to be increased

The required amount of debt is computed below which is x

1.7=x/132,775,000.00

x=1.7*132,775,000.00

x=$ 225,717,500.00

Required debt is $225,717,500.00

amount of debt issue=required debt-existing debt= 225,717,500.00-27,000,000=$198,717,500.00