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 weight should be assigned to the preferred stock when computing the weighted average cost of capital?

Question

River Terrell

Business

23 December, 08:40

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 weight should be assigned to the preferred stock when computing the weighted average cost of capital?

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Answers (1)

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Octavio Montes · Answer 1

5.40%

Explanation:

For computing the weight, first we have to determine the total market value which is shown below:

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

= 650 bonds * $1,007 + 2,100 shares * $68 + 42,000 shares * $44

= $654,550 + $142,800 + $1,848,000

= $2,645,350

Now the weight of preferred stock would be

= Total value of preferred stock : total market value * 100

= $142,800 : $2,645,350 * 100

= 5.40%