Suppose that a company's equity is currently selling for $20 per share and that there are 2 million shares outstanding. If the firm also has 8 thousand bonds outstanding, which are selling at 99 percent of par ($1,000), what are the firm's current capital structure weights for equity and debt respectively?

Question

Quizplus · Accepted Answer

The market value of equity is $20 * 2,000,000 = $40,000,000. The market value of debt is 8,000 * $1,000 * 0.99 = $7,920,000. The total market value is $40,000,000 + $7,920,000 = $47,920,000. The weight of equity is $40,000,000 / $47,920,000 = 83.47%, and the weight of debt is $7,920,000 / $47,920,000 = 16.53%.

Suppose That a Company's Equity Is Currently Selling for $20