Jackson & Jackson (J&J) has a $1 million bond issue outstanding that is selling at 101.3 % of face value. J&J also has 25,000 shares of preferred stock and 450,000 shares of common stock outstanding. The preferred stock has a market price of $36 a share compared to a price of $24 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?

Question

Quizplus · Accepted Answer

The weight of the debt in the firm's weighted average cost of capital (WACC) is calculated by dividing the market value of the debt by the total market value of the firm's financing (debt + preferred stock + common stock). The market value of the debt is $1,013,000 (101.3% of $1,000,000). The market value of the preferred stock is $900,000 (25,000 shares * $36/share). The market value of the common stock is $10,800,000 (450,000 shares * $24/share). The total market value of the firm's financing is $12,713,000 ($1,013,000 + $900,000 + $10,800,000). The weight of the debt is $1,013,000 / $12,713,000 = 7.97%.

Jackson & Jackson (J&J) Has a $1 Million Bond Issue