Question

Suppose that Papa Bell, Inc.'s equity is currently selling for $45 per share, with 4 million shares outstanding. The firm also has 7,000 bonds outstanding, which are selling at 94 percent of par. Assume Papa Bell was considering an active change to its capital structure so as to have a D/E of 0.4. Which type of security (stocks or bonds) would the firm need to sell to accomplish this? O sell bonds and buy back stock O sell stocks and buy back bonds How much would it have to sell? (Enter your answer in dollars not in millions. Round your intermediate calculations to 4 decimal places and final answer to 2 decimal places.) Selling amount

Answer 1

1:Sell stocks and buy back bonds (This will increase the debt amount)

2:

Current value of debt	6580000
Value of equity	180000000
D/E Ratio	0.0365556
Required D/E	0.4
Debt required=Current debt/D/E Ratio	16450000
Hence Amount of Equity to be sold=Debt required-Current debt	9870000

Workings

Book1- Excel AutoSave Oi Sign in O Tell me what you want to do Comments Share File Home Formulas Review View Help Insert Draw Page Layout Data Σ X Insert A A Calibri General 11 Delete Conditional Format as Cell Sort & Find & Paste A B IU Format T T Formatting Table Filter Select Styles Clipboard Cells Alignment Number Styles Editing Font г. Current value of debt B1 T A В C E F 7000*94%*1000 Current value of debt Value of equity 1 45 4000000 2 C1/C2 D/E Ratio Required D/E 4 0.4 -С1/C4 5 Debt required-Current debt/D/E Ratio Hence Amount of Equity to be sold Debt required-Current debt 6 -C5-C1 7 9 10 11 12 13 14 15 Sheet1 Sheet2 +100 % Ready E e W х‑ ENG (? 10:19 PM