Suppose that Lil John Industries' equity is currently selling for $64 per share and that there are 1 million shares outstanding. If the firm also has 20 thousand bonds outstanding, which are selling at 108 percent of par ($1,000), what are the firm's current capital structure weights?

Question

Quizplus · Accepted Answer

The market value of equity is $64 million (1 million shares * $64). The market value of debt is $21.6 million (20,000 bonds * $1,080). The total market value is $85.6 million. The weight of equity is $64 million / $85.6 million = 74.77%, and the weight of debt is $21.6 million / $85.6 million = 25.23%.

Suppose That Lil John Industries' Equity Is Currently Selling for $64