Capital Structures

Jack’s Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.5%. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. In the calculation of WACC, which of the following capital structure should be used?

A. Weight of debt is 1/3; weight of equity is 2/3

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B. Weight of debt is 2/3; weight of equity is 1/3

C. Weight of debt is 1/2; weight of equity is 1/2

D. Cannot be determined