Question

4. 16-3 Restructuring Strategy Suppose that Lil John Industries’ equity is currently sell- ing for $27 per share and that 2 million shares are outstanding. The firm also has 50,000 bonds outstanding, which are selling at 103 percent of par. If Lil John was considering an active change to its capital structure so that the firm would have a D/E of 1.4, which type of security (stocks or bonds) would it need to sell to accomplish this, and how much would the firm have to sell? (LG16-1)

Answer 1

Given,

Equity shares = 2000000

Rate per share = $ 27

Equity = 2000000 x $ 27 = $ 54000000

Bonds = 50000

Par value of bond = $ 1000

Debt = 50000 x $ 1000 x 103% = $ 51500000

Solution :-