Rekall Inc., the memory implant company, has 7 million shares of common stock ou
ID: 2804805 • Letter: R
Question
Rekall Inc., the memory implant company, has 7 million shares of common stock outstanding and 100,000 semiminusannual bonds. The bonds have 6 years to maturity, a 9.05% coupon rate and a face value of $1,000 each. The common stock currently sells for $29.94 and just paid a dividend of $2.50. Dividends are paid annually and are expected to grow in perpetuity at 3%. The bonds sell for 94% of face value and have a 10.42% yield to maturity. The market risk premium is 5.5%, Tminusbills are yielding 5% and the tax rate is 30%. What is the capital structure weight for equity?
A. 0.67
B. 0.71
C. 0.68
D. 0.70
E. 0.69
Explanation / Answer
market value of equity = 7,000,000*29.94
market value of bond = 100,000*940
weight = 0.69
Market value weight equity 209,580,000.00 0.6904 bond 94,000,000.00 0.3096