Warrant - LT liabilities Question total, equity, capital, structure

busprof

Wolfe Inc. has a capital structure consisting of $10mn of liabilities and $15mn of equity. Wolfe issues $0.7mn of preferred shares and $1.0mn of bonds with warrants attached (debt component comprises 80% and equity 20%) for total cash proceeds of 1.7mn. Find revised debt-to-total capital ratio upon the issuance of the two new financial instruments.

Soln: The $0.7mn of preferred shares are treated as equity.
For the warrants, $0.8mn would be treated as debt and 0.2mn as equity.
Liabilities = 10.8mn.
Equity = 15+0.7+0.2 = $15.9
Debt to total capital = 0.404

Shouldn't the liability total the cash proceeds and then be amortized subsequently?

farrukhsadiq

Well it asks for the Debt/Cap ratio upon issuance.

So there was $10mm of debt outstanding then $0.8mm issued for the numerator.
$15mm of equity outstanding plus preferred shares and equity warrants in the denominator.

soddy1979

(duplicate post)



Edited 1 time(s). Last edit at Saturday, April 17, 2010 at 03:48PM by movingonup.