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 nearest percent.

Question

Quizplus · Accepted Answer

Step 1 - Calculate the value of the firm's securities. V = E + D + P E = 21 × 21,000 = 441,000D = 1.02 × 400,000 = 408,000P = 44 × 4,500 = 198,000V = 1,047,000 Step 2 - Calculate the weight of debt. W_d = D/V W_d = 408,000 / 1,047,000 = 38.97% or 39%

Watson's Automotive Has a $400,000 Bond Issue Outstanding That Is