Question

"Big Burger has 100,000 shares of common stock outstanding at a market price of $40 a share. There are 10,000 shares of 8 percent preferred stock outstanding at a market price of $30 a share. The firm has 1000 bonds outstanding with a face value of $1,000 and a market price of $960. The firm’s tax rate is 34 percent. What weight should be assigned to the cost of common stock when computing the weighted average cost of capital?"

Answer 1

weight % of equity = 76.05%

weight % of preferred stock = 5.70%

weight % of debt = 18.25%

Step-by-step explanation:

calculation for equity:

total number of equity is 100,000

market price of stock = 40

so total value of stock = 40 × 100,000 = 4,000,000

calculation for preferred stock:

total number of share is 10,000

market price of stock = 30

so total value of stock = 30 × 10,000 = 300,000

calculation for debt:

total number of bond is 1,000

market price of bonds = 960

so total value of stock = 960 × 1,000 = 960,000

total value = 4,000,000 + 300,000 + 960,000 = 5,260,000

Calculation of weight percentage

weight % of equity =
`(4,000,000)/(5,260,000) = 0.7604 = 76.04%`

weight % of preferred stock
`= (300,000)/(5,260,000) = 0.0570 = 5.70`%

weight % of debt
`= (960,000)/(5,260,000) = 0.1825 = 18.25\%`