1. A firm has 12,000 shares of common stock outstanding with a book value of $20
ID: 2754632 • Letter: 1
Question
1. A firm has 12,000 shares of common stock outstanding with a book value of $20 per share and a market value of $39. There are 5,000 shares of preferred stock with a book value of $10 and a market value of $26. There is a $400,000 face value bond issue outstanding that is selling at 87% of par. What weight should be placed on the preferred stock when computing the firm's WACC?
A. 7.25%
B. 13.74%
C. 11.48%
D. 15.09%
2. To calculate the present value of a business, the firm's free cash flows should be discounted at the firm's:
A. weighted-average cost of capital.
B. pre-tax cost of debt.
C. aftertax cost of debt.
D. cost of equity
Explanation / Answer
1)
Market Value of Common Stock = 12000 * 39 = $ 468000
Market value of Preferred Stock = 5000* 26 = 130000
Market Value of Bond = 400000*87% = 348000
Total Market Value =468000 + 130000+348000 = 946000
Weight of Preferred Stock = 130000/946000
Weight of Preferred Stock = 13.74%
Answer
B. 13.74%
2. To calculate the present value of a business, the firm's free cash flows should be discounted at the firm's:
A. weighted-average cost of capital.
Note : Value of Firm = Expected FCFF/(WACC-g)
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