MT company has approached you for advice on its capital structure:

• MT has $200 million of 15-year bonds (paying interest semiannually) with a stated coupon rate of 5.34 percent p.a. The company has a BB credit rating. Companies with similar credit ratings are currently paying a premium of 275 basis points (2.75%) above the yield on U.S. Treasury bonds (i.e., the risk-free rate), currently yielding 1.50 percent p.a. The company faces a marginal tax rate of 22 percent.
• MT has $100 million of 5-year convertible bonds (paying interest semiannually) with a stated coupon rate of 2.0 percent p.a. Current market yields on 5-year straight bonds for other companies with BB credit ratings is 3.54 percent p.a. The convertible bonds were recently trading at $1,100 per $1,000 bond in the OTC market.
• In its financial statements MT reports operating leases outstanding with obligations averaging $20 million per year over the next 9 years.
• MT has 1,530,000 shares of $100 par value preferred stock outstanding paying a fixed dividend of $4.25 per share. If publicly traded, the stock would likely be valued at $91.50 per share.
• The total book value of the companys common equity is $1,000 million with 45 million shares of common stock outstanding. The companys stock is not publicly traded but data from comparable companies showed an average beta of 1.43 and these companies had an average debt-equity ratio of 0.74 and paid an average tax rate of 25 percent. MT believes its own cost of equity could be found using a leveraged beta based on the total book value weights of the companys straight debt, its convertible debt, listed solely as debt on the balance sheet, its operating leases, and its equity. In calculating total equity, please include the sum of the common equity and the preferred stock but disregard the stock options. The company just paid a dividend (D₀) of $2.57 per share of stock and future dividends are expected to grow at a rate of 2 percent per year indefinitely. The risk-free rate (i.e., current yield on 10-year U.S. Treasury bonds is 1.50 percent p.a.) and the expected return on the S&P 500 is 8.55 percent p.a.
• Managers and employees of the company currently hold options on 15 million shares of common stock; the options are currently valued at $4.20 per share

1. The book values of each capital item and the book value weights that comprise the companys capital structure. Note that only the bonds, convertible debt, operating leases, preferred stock, and common stock are reported on the balance sheet and would thus have book values