Question $5.(9$ marks$)$

Bank of America has $14$ million common shares outstanding with current price of $$50$ and book

value of $$18$ a share and a beta of $1\mathrm{.}88.$ They also have two bond issues outstanding. The first

bond issue has book value of $$100$ million, coupon rate of $11\%$ and currently sells at $125\mathrm{.}678\%$ of

par. The second bond issue is a zero coupon bond with book value of $$50$ million and currently

sells at $43\%.$ Maturity of both bonds is $15$ years. The tax rate is $45\%.$ Market return is $8\%$ and the

T$.$ bill rate is $3\mathrm{.}5\%.$