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28 December, 07:48

Theresa's Flower Garden has 750 bonds outstanding that are selling for $989 each, 2,500 shares of preferred stock with a market price of $47 a share, and 30,000 shares of common stock valued at $56 a share. What weight should be assigned to the common stock when computing the firm's weighted average cost of capital?

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  1. 28 December, 09:40
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    weight of preferred stock = 4.63 %

    Explanation:

    given data

    Number of outstanding bonds = 750

    selling price = $989 each

    preferred stock = 2,500 shares

    market price = $47 a share

    number of common stock = 30,000

    common stock valued = $56 share

    solution

    we first get here total market value that is express as

    total market value = Number of outstanding bonds * selling price per bond + number of preferred stock * market price per share + number of common stock * par value per share ... 1

    put here value and we get

    total market value = 750 * $989 + 2,500 * $47 + 30,000 * $56

    solve it we get

    total market value = $2539250

    and

    here now we get weight of preferred stock that will be

    weight of preferred stock = Total value of preferred stock : total market value * 100 ... 2

    put here value

    weight of preferred stock = (2,500 * $47) : $2539250 * 100

    weight of preferred stock = 4.63 %
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