Question

Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 a share, and 42,000 shares of common stock valued at $44 a share. What weight should be assigned to the preferred stock when computing the weighted average cost of capital? Multiple Choice 5.40 percent 5.75 percent 6.67 percent 6.08 percent 5.00 percent

Answer 1

Answer:

Market value of common stock = 42,000 x $44 =  $1,848,000

Market value of preferred stocks = 2,100 x $68 =  $142,800

Market value of bonds                  = 650 x $1,007 = $654550

Market value of the firm                                          = 2,645,350

The weight that should be assigned to preferred stocks when calculating WACC = $142,800/$2,645,350 x 100 = 5.40%

Explanation:

In this case, there is need to calculate the market value of the firm, which is the aggregate of market value of common stocks, market value of preferred stocks and market value of bond.

Finally we will calculate the weight of preferred stocks by dividing the market value of preferred stocks by the market value of the company.