Jackson & Jackson (J&J) has a $1 million bond issue outstanding that is selling at 101.3 percent 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

To calculate the weight of the debt, we need to first calculate the total market value of J&J's capital structure:
Total market value = (number of preferred shares x price per preferred share) + (number of common shares x price per common share) + (face value of bonds x bond selling price)
Total market value = (25,000 x $36) + (450,000 x $24) + ($1,000,000 x 1.013)
Total market value = $20,925,000
Weight of debt = (face value of bonds x bond selling price) / total market value
Weight of debt = ($1,000,000 x 1.013) / $20,925,000
Weight of debt = 0.048
Weight of debt = 4.8%
Therefore, the weight of debt as it relates to J&J's weighted average cost of capital is 7.97% (since we are only considering debt and equity, we can assume the weight of equity is 100% - 4.8% = 95.2%).

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