Question

OMG Inc. has 7 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 4,000 bonds. Suppose the common shares sell for $19 per share, the preferred shares sell for $18 per share, and the bonds sell for 108 percent of par. What weight should you use for preferred stock in the computation of OMG’s WACC?

Answer 1

39.59%

Step-by-step explanation:

The weight that i should use for preferred stock in the computation of the OMG' WACC shall be determined using the following mentioned formula:

Weight of preferred stock=market value of preferred stock/Total market value of common stock+preferred stock+bonds

Market value of preferred stock=5,000,000*18=$90,000,000

Total market value of common stock+preferred stock+bonds=7,000,000*19+$90,000,000+4,000*108%*1,000

Total market value of common stock+preferred stock+bonds=$227,320,000

Weight of preferred stock=$90,000,000/$227,320,000=39.59%