S&W has 21,000 shares of common stock outstanding at a price of $29 a share.It also has 2,000 shares of preferred stock outstanding at a price of $71 a share.The firm has 7 percent, 12-year bonds outstanding with a total market value of $386,000.The bonds are currently quoted at 100.6 percent of face and pay interest semiannually.What is the capital structure weight of the firm's preferred stock if the tax rate is 34 percent?

Question

Quizplus · Accepted Answer

The correct answer is A because the capital structure weight of the firm's preferred stock is 12.49 percent. This is calculated by dividing the market value of the preferred stock by the total market value of the firm's capital. The market value of the preferred stock is $2,000 * $71 = $142,000. The total market value of the firm's capital is $21,000 * $29 + $142,000 + $386,000 = $860,000. Therefore, the capital structure weight of the firm's preferred stock is $142,000 / $860,000 = 12.49 percent.

S&W Has 21,000 Shares of Common Stock Outstanding at a Price