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?

Answer 1

Answer:

5.40%

Explanation:

For computing the weight, first we have to determine the total market value which is shown below:

= Number of outstanding bonds × selling price per bond + number of preferred stock × market price per share + number of common stock × par value per share

= 650 bonds × $1,007 + 2,100 shares × $68 + 42,000 shares × $44

= $654,550 + $142,800 + $1,848,000

= $2,645,350

Now the weight of preferred stock would be

= Total value of preferred stock ÷ total market value × 100

=  $142,800 ÷ $2,645,350 × 100

= 5.40%