Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 a share, and 42,000 shares of common stock valued at $44 a share. What weight should be assigned to the preferred stock when computing the weighted average cost of capital?

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Quizplus · Accepted Answer

To calculate the weight of the preferred stock in the capital structure, first determine the market value of each component: bonds, preferred stock, and common stock. Then, calculate the proportion of the preferred stock's value to the total market value.- Bonds: 650 bonds * $1,007 = $654,550- Preferred Stock: 2,100 shares * $68 = $142,800- Common Stock: 42,000 shares * $44 = $1,848,000Total Market Value = $654,550 (bonds) + $142,800 (preferred stock) + $1,848,000 (common stock) = $2,645,350Weight of Preferred Stock = $142,800 / $2,645,350 = 0.054 or 5.40 percent

Theresa's Flower Garden Has 650 Bonds Outstanding That Are Selling