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The Auto Group has 1,000 bonds outstanding that are selling for $900 each. The company also...

The Auto Group has 1,000 bonds outstanding that are selling for $900 each. The company also has 8,900 shares of preferred stock at a market price of $45 each. The common stock is priced at $40 a share and there are 35,000 shares outstanding. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?

Solutions

Expert Solution

Debt in the firm’s capital structure= $900*1,000= $900,000

Preference shares in the firm’s capital structure= $45*8,900= $400,500

Equity in the firm’s capital structure= $40* 35,000= $1,400,000

Total firm capital= $900,000 + $400,500 + $1,400,000

                                 = $2,700,500.

Weight of preference shares = $400,500/ $2,700,500

                                                 = 0.1483*100

                                                 = 14.83%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago
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