Initech has 7 million shares of common stock outstanding and 50,000 bo

Initech has 7 million shares of common stock outstanding and 50,000 bonds outstanding. The bonds pay semi-annual coupons at an annual 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?
A) 18.3%
B) 19.3%
C) 20.3%
D) 21.3%
E) 22.3%

ANSWER

A