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77julia77 [94]
3 years ago
12

JKL has 3 million shares of common stock outstanding and 80,000 bonds outstanding. The bonds pay semi-annual coupons at an annua

l 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 equity
Business
1 answer:
mylen [45]3 years ago
8 0

Answer:

54.48%

Explanation:

The computation of the weight of equity is given below;

But before that we need to do the following calculations

Total Equity

= 3 million shares × $30

= $90 million

The Value of Debt,

Total Debt = 80,000 (1,000)(0.94)

= $75.2 million

Now the weight of equity is

= $90 million ÷ ($90 million + $75.2 million)

= 54.48%

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Assume you are in the 35 percent tax bracket and purchase a municipal bond with a yield of 7.25 percent. Use the formula present
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before tax corportate bond equivalent: 11.15%

Explanation:

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thus, the municipal bond rate should be compare with the after tax rate of a corporate bond:

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