Suppose That a Company's Equity Is Currently Selling for $22

Suppose that a company's equity is currently selling for $22 per share and that there are 4 million shares outstanding and 30 thousand bonds outstanding, which are selling at 101 percent of par ($1,000) . If the firm was considering an active change to their capital structure so that the firm would have a D/E of 0.9, which type of security (stocks or bonds) would they need to sell to accomplish this, and how much would they have to sell?

A) $25,736,842 in new debt
B) $10,434,060 in new debt
C) $10,434,060 in new equity
D) $25,742,080 in new equity

Correct Answer:

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