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Watson\'s Automotive has a $400,000 bond issue outstanding that is selling at 10

ID: 2804885 • Letter: W

Question

Watson's Automotive has a $400,000 bond issue outstanding that is selling at 102 percent of face value. Watson's also has 4,500 shares of preferred stock and 21,000 shares of common stock outstanding. The preferred stock has a market price of $44 a share compared to a price of $21 a share for the common stock. What is the weight of the debt as it relates to the firm's weighted average cost of capital? Round answer to the nearest percent.

A. 42 percent

B. 39 percent

C. 41 percent

D. 38 percent

E. 40 percent

Explanation / Answer

Total value of bonds=(400,000*102%)=408000

Total value of common stock=(21000*21)=441000

Total value of preferred stock=(4500*44)=198000

Total=$1047000

Hence weight of debt=(408000/1047000)

=39%(Approx).