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?
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.