Gillian's Boutique has 850,000 shares of common stock outstanding at a market price of $16 a share. The company also has 15,000 bonds outstanding that are quoted at 98 % of face value. What weight should be given to the common stock when Gillian's computes their weighted average cost of capital?

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Quizplus · Accepted Answer

The weight of the common stock is calculated as follows:Weight of common stock = (Market value of common stock / (Market value of common stock + Market value of bonds))Market value of common stock = 850,000 shares * $16 per share = $13,600,000Market value of bonds = 15,000 bonds * 98% of face value * $1,000 face value = $14,700,000Weight of common stock = $13,600,000 / ($13,600,000 + $14,700,000) = 48%

Gillian's Boutique Has 850,000 Shares of Common Stock Outstanding at a Market