Bill's Boards has 20 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $30 per share, the preferred shares are selling for $17 per share, and the bonds are selling for 96 percent of par, what would be the weight used for debt in the computation of Bill's WACC?
A) 0.83 percent
B) 2.79 percent
C) 2.87 percent
D) 3.33 percent

Question

Quizplus · Accepted Answer

To calculate the weight used for debt in the computation of Bill's WACC, we first need to find the market value of each type of security and then find the proportion of each in the total market value. - The market value of common stock = 20 million shares * $30/share = $600 million- The market value of preferred stock = 4 million shares * $17/share = $68 million- Since the bonds are at 96% of par and assuming a par value of $1,000 (standard for bonds), the market value of bonds = 20,000 bonds * $1,000 * 96% = $19.2 millionTotal market value = $600 million + $68 million + $19.2 million = $687.2 millionThe weight of debt (bonds) = Market value of bonds / Total market value = $19.2 million / $687.2 million = 0.0279 or 2.79%

Bill's Boards Has 20 Million Shares of Common Stock Outstanding