Question

Florida Groves has a $250,000 bond issue outstanding that is selling at 102 percent of face value. The firm also has 2,000 shares of preferred stock valued at $38 a share and 45,000 shares of common stock valued at $24 a share. What weight should be assigned to the preferred stock when computing the firm's weighted average cost of capital?

Answer 1

0.05386 or 5.39%

Step-by-step explanation:

Market Value of debt:

= 102% × $250,000

= 2,55,000

Market value of Preferred stock:

= 2,000 shares × $38

= 76,000

Market value of common stock:

= 45,000 shares × $24

= 10,80,000

Total Enterprise Value:

= Market Value of debt + Market value of Preferred stock + Market value of common stock

= 2,55,000 + 76,000 + 10,80,000

= 14,11,000

Weight of Preferred stock = Market value of Preferred stock ÷ Total Enterprise Value

= 76,000 ÷ 14,11,000

= 0.05386 or 5.39%