Suppose that Papa Bell Inc.'s equity is currently selling for $95 per share, with 4 million shares outstanding. If the firm also has 80 thousand bonds outstanding, which are selling at 91.5 percent of par ($1,000), what are the firm's current capital structure weights?

Question

Quizplus · Accepted Answer

The correct answer is A because the weight of equity is calculated as the market value of equity divided by the total market value of the firm, which is $95 * 4,000,000 / ($95 * 4,000,000 + $1,000 * 80,000 * 0.915) = 83.85%. The weight of debt is calculated as the market value of debt divided by the total market value of the firm, which is $1,000 * 80,000 * 0.915 / ($95 * 4,000,000 + $1,000 * 80,000 * 0.915) = 16.15%.

Suppose That Papa Bell Inc