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 the equity is $64 x 1,000,000 = $64,000,000. 
The market value of the debt is $1,080 x 20,000 = $21,600,000.

The total market value of the firm's capital structure is $64,000,000 + $21,600,000 = $85,600,000.

The weight of equity is the market value of equity divided by the total market value of the firm's capital structure. 
Weight of Equity = $64,000,000 / $85,600,000 = 0.7477 = 74.77%.

The weight of debt is the market value of debt divided by the total market value of the firm's capital structure.
Weight of Debt = $21,600,000 / $85,600,000 = 0.2523 = 25.23%.

Therefore, the correct choice is C.

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