Question

Dirty Don's Bicycle Shop is current financed with 100% equity. The firm currently has 100,000 shares of common stock outstanding, selling for $50 per share. Don is considering a capital restructuring project, where the firm would be financed with 45% debt and 55% equity. How many bonds would Don have to sell at par value

Answer 1

Answer:

2250

Explanation:

Assumption: Par value of the bonds to be issued is $1000

Current Capital structure is 100% equity financed of Dirty Don's Bicycle Shop.

Share capital of Dirty Don's bicycle shop = 1,00,000 shares × $50

                                                                                        = $5000000

After restructuring, the capital structure shall comprise of 45% debt and 55% equity.

Hence, the proportion of debt = 45% of $50,00,000 = $22,50,000

Assumed: par value of bond is $ 1000

In this case, the number of bonds to be sold = $\frac{2250000}{1000}$ = 2250 bonds

Thus, 2250 bonds will have to be sold at $1000.

Bonds refer to debt instruments whereby the borrower raises long term finance in exchange for making periodic coupon payments in the form of interest and principal repayment upon date of maturity.