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A firm has 12,000 shares of common stock outstanding with a book value of $20 per...

A firm has 12,000 shares of common stock outstanding with a book value of $20 per share and a market value of $39. There are 5,000 shares of preferred stock with a book value of $22 and a market value of $26. There is a $400,000 face value bond issue outstanding that is selling at 87% of par. What weight should be placed on the preferred stock when computing the firm's WACC?

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Answer #1

we have to use Market value of Components in capital Structure to Calculate Weights in WACC

1. Value of Common Stock = Shares o/s * Market Value = 12000 * 39 = $468000

Value of Preferred Stock = Shares o/s * Market Value = 5000 * 26 = $130000

Value of Debt = Face Value * Market % = 400000 * 87% = 348000

Total Value of Company = Value of Equity + value of Preferred + value of Debt

Total Value of Company = 468000 + 130000 + 348000

Total Value of Company = 946000

2. Weight of Preferred Stock = Market Value of Preferred Stock / Value of Company

Weight of Preferred Stock = 130000 / 946000

Weight of Preferred Stock = 13.74%

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