Question 1 (of 10) value 10.00 points Suppose that Papa Bell, Inc.\'s, equity is

Question

Question 1 (of 10) value 10.00 points Suppose that Papa Bell, Inc.'s, equity is currently selling for $43 per share, with 3.8 million shares outstanding. The firm also has 9,000 bonds outstanding, which are selling at 93 percent of par. Assume Papa Bell was considering an active change to its capital structure so as to have a D/E of 0.3 Which type of security (stocks or bonds) would the firm need to sell to accomplish this? e Sell bonds and buy back stock Sell stock and buy back bonds 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.) Selling amount

Explanation / Answer

The current capital weights are:

E = $43 x 3,800,000 = $163,400,000

D = 9000 x $1000 x 0.93 = $83,70,000

(E + D) = $171,770,000

Equity = E / E+D = 95.12%

Debt = D / E+D = 4.87%

And therefore the current D/E is 0.0487 / 0.9512 = 0.0511

Since, Papa Bell was considering an active change to its capital structure so as to have a D/E of 0.3, so they have to increase its ratio,

To do so, they would have to change their debt ratio to 0.3 /1.3 = 0.2307

And this would require issuing or selling bonds and then using the proceeds to buy back stocks!

This would require issuing:

= (0.2307-0.0511) x [$163,400,000 + $83,70,000]

=$30,849,892.00

Hence, $30,849,892.00 amount of bonds (of new debt) should be issued (sell) and using the proceeds to buy back the stocks.

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