Question

Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 a share, and 42,000 shares of common stock valued at $44 a share. What weights should be assigned to the preferred stock, debt, and equity when computing the weighted average cost of capital?

Answer 1

The weights are computed as shown below:

Preferred stock weight is computed as follows:

= (Number of preferred shares x market price) / (Number of preferred shares x market price + Number of bonds x price per bond + Number of common stock + Price per share)

= (2,100 shares x $ 68) / (2,100 shares x $ 6,800 + 650 bonds x $ 1,007 + 42,000 shares x $ 44)

= $ 142,800 / ($ 142,800 + $ 654,550 + $ 1,848,000)

= $ 142,800 / $ 2,645,350

= 0.053981515

Debt weight is computed as shown below:

= (650 bonds x $ 1,007 ) / (2,100 shares x $ 6,800 + 650 bonds x $ 1,007 + 42,000 shares x $ 44)

= $ 654,550 / ($ 142,800 + $ 654,550 + $ 1,848,000)

= $ 654,550 / $ 2,645,350

= 0.247434177

Equity weight is computed as shown below:

= (42,000 shares x $ 44) / (2,100 shares x $ 6,800 + 650 bonds x $ 1,007 + 42,000 shares x $ 44)

= $ 1,848,000 / ($ 142,800 + $ 654,550 + $ 1,848,000)

= $ 1,848,000 / $ 2,645,350

= 0.698584308

Feel free to ask in case of any query relating to this question