Question

Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital?

Answer 1

Answer:

Weight of the common stock = 45%

Explanation:

WACC is the average cost of a company long-term sources of finance. Each source is weighted according to the proportion of its  market value to the total market value of the pool of funds.

To calculate the weighted of the common stock , we will follow the steps

below:

Step 1

Calculate the total market value of all the sources of fund

Market value of common stock

Bonds =  $990 × 1,200 = $ 1,188,000

Preferred Stock = $28 × 2500 =$70,000

Common stock =  $37 × 28,000 =$1,036,000

Total market value =  1,188,000+ 70,000 + 1,036,000

$2,294,000.00

Step 2

Calculate the weight of common stock

Weight of the common stock = ($1,036,000/ $2,294,000.00 ) × 100

                                              = 45%

Weight of the common stock = 45%