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 percent of face
Value. What weight should be given to the common stock when Gillian's computes their weighted
Average cost of capital?

Question

Quizplus · Accepted Answer

The market value of the common stock is $16 * 850,000 = $13,600,000. The market value of the bonds is 0.98 * 15,000 * $1,000 = $14,700,000. The total market value of the firm is $13,600,000 + $14,700,000 = $28,300,000. The weight of the common stock is $13,600,000/$28,300,000 = 48%.

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