Question

INSERTPAGE LAYOUT HOME FORMULAS V E VIEW Son Font Alignment Number c Editing ells Conditional Formats o Formatting Table Styles Styles Suppose that Papa Bell, Inc.'s, equity is currently selling for $41 per share, with 3.6 million shares outstanding. The firm also has 8,000 bonds outstanding, which are selling at 95 percent of par. Assume Papa Bell was considering an active change to its capital structure so as to have a D/E of 0.5 Which type of security (stocks or bonds) would the firm need to sell to accomplish this? How much would it 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.) Share price Shares outstanding Bonds outstanding Bond price (% of par) Proposed new D/E ratio 41.00 3.600.000 8,000 95.00% 0.50

Answer 1

To calculate proposed Debt to Equity ratio or D/E.

Current D/E of company is

Share valuation - $41*3600000= $147600000

Bond Valuation - $950*8000 = $7600000 ( Note: 95% of par means $950 because $1000 is par value.

= 7600000/147600000= 0.05

Now we need Proposed D/E is 0.5 so we have to sell the share of the company.

total share need to be sell is 3230000.

New D/E is share Value 41*370000 = 15170000

Bond value 950*8000 = 760000

D/E = 7600000/15170000 = 0.5