Theresa’s Flower Garden has 750 bonds outstanding that are selling for $989 each

Question

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?

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?

Explanation / Answer

Number Market price Value A B A*B Bonds 750 989 741750 Preferred Stock 2500 47 117500 Common Stock 30000 56 1680000 Total 2539250 Weight assigned to common stock = Value of Common stock / Total Value                 = 1680000 / 2539250 * 100                = 66 .16 % Hence option 3 is correct

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