Question

The Auto Group has 1,000 bonds outstanding that are selling for $980 each. The company also has 9,700 shares of preferred stock at a market price of $85 each. The common stock is priced at $80 a share and there are 43,000 shares outstanding. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?

Answer 1

Answer:

The first thing that we need to do in this question is find the total capital of the Group. They get their capital from three sources which are bonds, preferred stock and common stock. We need to find the capital provided by each of these 3 sources and add them up. After that we will see what ratio of capital is provided by preferred stock, and this ratio will be the weight of preferred stock as it related to the firms weighted average cost of capital.

Bonds

1000*980=980,000

Preferred stock = 9700*85= 824,500

Common stock= 43,000*80= 3,440,000

980,000+824,500+3,440,000= 5,244,500

Preferred weight = 824,500/5,244,500= 0.157 = 15.7%

The weight of preferred stock is 15.7%

Explanation: