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?

Question

Quizplus · Accepted Answer

The weight of the debt is calculated by dividing the market value of the debt by the total market value of the firm's financing. The bond's market value is $400,000 * 1.02 = $408,000. The preferred stock's market value is 4,500 * $44 = $198,000. The common stock's market value is 21,000 * $21 = $441,000. The total market value is $408,000 + $198,000 + $441,000 = $1,047,000. The weight of the debt is $408,000 / $1,047,000 = 0.389, or 39 percent.

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