Question

Western Electric has 23,000 shares of common stock outstanding at a price per share of $57 and a rate of return of 14.2 percent. The firm has 6,000 shares of 7 percent preferred stock outstanding at a price of $48 a share. The preferred stock has a par value of $100. The company also has 350 corporate bonds, each with $1000 par value, and the bond currently sells for 102 percent of face. The yield-to-maturity on the debt is 8.49 percent. What is the capital structure weight of the firm's preferred stock? A. 9.89% B. 14.72% C. 21.57% D. 28.26%

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=57*23000

=1311000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*350*1.02

=357000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=48*6000

=288000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=1311000+357000+288000

=1956000

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 288000/1956000

W(PE)=0.1472 = 14.72%