Mistletoe Unlimited has 1,100 bonds outstanding that are selling for $992 each. The company also has 9,500 shares of preferred stock at a market price of $46 each. The common stock is priced at
$29 a share and there are 34,500 shares outstanding. What is the weight of the preferred stock as
It relates to the ﬁrm's weighted average cost of capital?

Question

Quizplus · Accepted Answer

The weight of preferred stock can be calculated using the formula:

Weight of preferred stock = (Market value of preferred stock / Total market value of firm) x 100

Market value of preferred stock = 9,500 x $46 = $437,000
Market value of bonds = 1,100 x $992 = $1,091,200
Market value of common stock = 34,500 x $29 = $1,000,500

Total market value of the firm = $437,000 + $1,091,200 + $1,000,500 = $2,528,700

Therefore, the weight of preferred stock = ($437,000 / $2,528,700) x 100 = 17.27%

Rounding to the nearest whole number, the answer is B: 17 percent.

Mistletoe Unlimited Has 1,100 Bonds Outstanding That Are Selling for $992