Question

# 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?

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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