The Auto Group has 1,000 bonds outstanding that are selling for $950 each. The c
ID: 2654780 • Letter: T
Question
The Auto Group has 1,000 bonds outstanding that are selling for $950 each. The company also has 9,400 shares of preferred stock at a market price of $70 each. The common stock is priced at $65 a share and there are 40,000 shares outstanding. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?
61.79 percent
22.58 percent
7.82 percent
31.27 percent
15.64 percent
The Auto Group has 1,000 bonds outstanding that are selling for $950 each. The company also has 9,400 shares of preferred stock at a market price of $70 each. The common stock is priced at $65 a share and there are 40,000 shares outstanding. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?
Explanation / Answer
Weight of the preferred stock = (9,400 shares x $70) / (1000 bonds x $950) + (9,400 shares x $70) + (40,000 shares x $65)
Weight of the preferred stock = $658,000 / ($950,000 + $658,000 + $2,600,000)
Weight of the preferred stock = $658,000 / $4,208,000 = 15.64%
Thus option (e) 15.64 percent is the correct answer.
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