Question

LucaCorp.'s 4.3% bonds are currently quoted as trading at "89." There are 10,000 bonds outstanding. The firm's marginal tax rate is 30%. The firm's stock is trading for $53 per share, with 1 million shares outstanding. The weight of the debt, WD, is ____%

Answer 1

When the bond price is quoted as 89 that indicates
that it is selling at 89 percent of the face value of $1000.
Price of the bond	.89*1000
Price of the bond	890
Number of bonds outstanding	10000
Total debt	Number of bonds outstanding*Price of the bond.
Total debt	10000*890
Total debt	8900000
Number of shares outstanding	1000000
Stock Price	53
Total Equity	Number of shares outstanding*Stock Price
Total Equity	1000000*53
Total Equity	53000000
Weight of the debt	Total debt/(Total debt + Total equity)
Weight of the debt	8900000/(8900000 + 53000000)
Weight of the debt	0.14378
The weight of the debt is 14.38%.