Suppose that a company's equity is currently selling for $45 per share and that there are 1 million shares outstanding. If the firm also has 7 thousand bonds outstanding, which are selling at 97 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

Question

Quizplus · Accepted Answer

The firm's equity value is $45 * 1,000,000 = $45,000,000. The firm's debt value is $1,000 * 0.97 * 7,000 = $6,790,000. The total value of the firm is $45,000,000 (equity) + $6,790,000 (debt) = $51,790,000. The equity weight is $45,000,000 / $51,790,000 = 0.8689 or 86.89%. The debt weight is $6,790,000 / $51,790,000 = 0.1311 or 13.11%.

Suppose That a Company's Equity Is Currently Selling for $45