Paper Exchange has 10 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 98 percent of par, what would be the weight used for preferred stock in the computation of Paper's WACC?
A) 12.00 percent
B) 12.56 percent
C) 5.00 percent
D) 3.33 percent

Question

Quizplus · Accepted Answer

To calculate the weight of preferred stock in the WACC, first, we need to calculate the market value of each component (common stock, preferred stock, and bonds). Common stock = 10 million shares * $25 = $250 million. Preferred stock = 5 million shares * $10 = $50 million. Bonds = 100,000 bonds * $1,000 * 98% = $98 million (assuming par value is $1,000). Total market value = $250 million + $50 million + $98 million = $398 million. Weight of preferred stock = $50 million / $398 million = 12.56%.

Paper Exchange Has 10 Million Shares of Common Stock Outstanding