Question

Theresa's flower garden has 750 bonds outstanding that are selling for $989 each, 2,500 shares of preferred stock with a market price of $47 a share, and 30,000 shares of common stock valued at $56 a share. what weight should be assigned to the common stock when computing the firm's weighted average cost of capital?

-47.11 percent
-66.16 percent
-54.00 percent
-55.45 percent
-62.08 percent

Answer 1

To find the weight of the common stock for WACC, calculate the market value for each type of capital, sum them to get the total market value, and divide the market value of common stock by the total market value. The correct answer, rounded to two decimal places, is -66.16 percent.

Step-by-step explanation:

To compute the weight assigned to the common stock when computing the firm's weighted average cost of capital (WACC), we must first calculate the total market value of each type of capital, which includes bonds, preferred stock, and common stock. The formula to find the weight of each type of capital is:

Weight of Capital Type = (Market Value of Capital Type) / (Total Market Value of All Capital)

First, calculate the market values:

• Bonds = 750 bonds * $989/bond = $742,500
• Preferred Stock = 2,500 shares * $47/share = $117,500
• Common Stock = 30,000 shares * $56/share = $1,680,000

Next, calculate the total market value:

Total Market Value = Market Value of Bonds + Market Value of Preferred Stock + Market Value of Common Stock

Total Market Value = $742,500 + $117,500 + $1,680,000

Total Market Value = $2,540,000

Then, compute the weight of the common stock:

Weight of Common Stock = Market Value of Common Stock / Total Market Value

Weight of Common Stock = $1,680,000 / $2,540,000

Thus, the weight assigned to the common stock is about 66.14%.

Therefore, the correct answer is -66.16 percent (rounded to two decimal places).