Question

LucaCorp.'s 4.5% bonds are currently quoted as trading at "96." There are 10,000 bonds outstanding. The firm's marginal tax rate is 30%. The firm's stock is trading for $47 per share, with 1 million shares outstanding. The weight of the debt, WD, is ____%.

Answer #1

Solution - Given in Question -

Bonds outstanding - 10,000 Bond

Market Price = $96 per Bond

Shares Outstanding = 10,00,000

Market Price = $47

Tax Rate - 30%

To Find weight of debt -

Total Value = Bond Outstanding * Market Price + Shares Outstanding * Market Price

Total Value = 10,000 * $96 + 10,00,000 * $47

Total Value = 9,60,000 + 4,70,00,000

Total Value = $4,79,60,000

Weight of Debt =

Weight of Debt =

Weight of Debt = 2%.

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