Question

Widgets Are Us has a $200,000 bond issue outstanding that is selling at 95 percent of face value. The firm also has 2,500 shares of preferred stock and 25,000 shares of common stock outstanding. The preferred stock has a market price of $45 a share compared to a price of $29 a share for the common stock. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?

Answer 1

	Amount	weight
equity	725,000.00	0.7056
debt	190,000.00	0.1849
preferred shares	112,500.00	0.1095

total

1,027,500.00

Weight of preferred stock = 112,500/1,027,500 = 0.1095