Suppose that Lil John Industries’ equity is currently selling for $33 per share
ID: 2336369 • Letter: S
Question
Suppose that Lil John Industries’ equity is currently selling for $33 per share and that 2.6 million shares are outstanding. The firm also has 56,000 bonds outstanding, which are selling at 103 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 1.4.
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.)
Suppose that Lil John Industries’ equity is currently selling for $33 per share and that 2.6 million shares are outstanding. The firm also has 56,000 bonds outstanding, which are selling at 103 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 1.4.
Explanation / Answer
Present Capital structure: Equity = 2600000*$33 = $ 8,58,00,000.00 Bonds (Debt) = 56000*$1030 = $ 5,76,80,000.00 Total capital $ 14,34,80,000.00 Debt equity ratio = 57680000/85800000 = 0.67 1) Answer: Sell stock and buy back bonds 2) Debt required = 1.4/2.4 of total capital = 143480000*1.4/2.4 = $ 8,36,96,666.67 Less: Existing debt $ 5,76,80,000.00 Amount for which stock should be sold $ 2,60,16,666.67 Answer