Q5: The book values of your equity and bonds are $200m and $100m respectively. The market

capitalization for your company is $800m and your bonds are currently valued at $120m. You

decide to issue $50m worth of bonds, but you already have a high financial leverage, which

makes you a high-risk company. Both the values of your stock and bonds go down by 20% and

10%.

A) What was your market-based debt/equity ratio prior to issuing bonds?

B) Why did the value of your stock and bonds drop?

C) What is your market-based debt/equity ratio after issuing bonds?