Question

Rivertrail Inc. has 12,000 shares of common stock outstanding. The book value is $20 per share, while the market value is $39 per share. It also has 5,000 shares of preferred stock with a book value of $22 per share; the market value of the preferred stock is $26 per share. Rivertrail has a $400,000 face value bond issue outstanding, which is selling at 87% of par. What weight should be placed on the preferred stock when computing the Rivertrail's WACC

Answer 1

Answer:

Preferred stocks wait = 36.79%

Explanation:

Common stock outstanding = 12,000 × $39 = $468,000

preferred stock = 5,000 × $26 = $130,000

outstanding bond = $400,000 × 87% = $348,000

Total capital = $946,000

Note: We have to use market value instate of book value.

The weight should be placed on the preferred stock when computing the Rivertrail's WACC = $348,000 ÷ $946,000 = $0.3679

Preferred stocks wait = $0.3679 × 100

Preferred stocks wait = 36.79%