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JimCorp 3.9% bonds are currently quoted as trading at "97." There are 10,000 bonds outstanding. The...

JimCorp 3.9% bonds are currently quoted as trading at "97." There are 10,000 bonds outstanding. The firm's marginal tax rate is 30%. The firm's stock is trading for $51 per share, with 1 million shares outstanding. The weight of the debt, WD, is ____%.

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Answer #1

Given about Jim Corp,

bonds are quoted at 97%

face value = 1000

=> Price of bond = 97% of 1000 = $970

There are 10,000 bonds outstanding.

=> Market value of debt = number of bonds*price of bonds = 10000*970 = $9700000

The firm's stock is trading for $51 per share, with 1 million shares outstanding

=> Market value of equity = number of shares*price per share = 1000000*51 = $51000000

So, weight of debt = Market value of debt/(MV of debt + MV of equity) = 9700000/(9700000+51000000) = 15.98%

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