Initech has 7 million shares of common stock outstanding and 50,000 bonds outstanding. The bonds pay semi-annual coupons at an a

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Initech has 7 million shares of common stock outstanding and 50,000 bonds outstanding. The bonds pay semi-annual coupons at an a

nnual rate of 9.05%, have 6 years to maturity and a face value of $1,000 each. The common stock currently sells for $30 a share and has a beta of 1. The bonds sell for 94% of face value and have a 10.42% yield to maturity. The market risk premium is 5.5%, T-bills are yielding 5% and the tax rate is 30%. What is the firm's capital structure weight for debt

Business

1 answer:

zhannawk [14.2K] · Answer 1 · 2022-02-27T14:22:04+03:00

Answer:

The firm's capital structure weight for debt is 18.29%

Explanation:

Common stock outstanding = 7 million shares

Outstanding bonds = 50,000 bonds

Calculating Value of Equity,

Total Equity = 7 million × $30 = $210 million

Calculating Value of Debt,

Total Debt = 50,000 × 1,000 × 0.94 = $47 million

Weight of Debt = 47 million ÷ (210 + 47 ) million

Weight of Debt = 18.29%