TellAll has 10 million shares of common stock outstanding, 20 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $32 per share, the preferred shares are selling for $20 per share, and the bonds are selling for 106 percent of par, what would be the weight used for preferred stock in the computation of TellAll's WACC?
A) 33.33%
B) 48.43%
C) 55.55%
D) 66.45%

Question

Quizplus · Accepted Answer

To compute the weighted average cost of capital (WACC), the weights of different sources of financing are to be considered.

Preferred stock weight = (Market value per preferred share x Number of preferred shares) / Total market value of equity

Market value per preferred share = $20 
Number of preferred shares = 20 million 
Total market value of equity = (Market value per common share x Number of common shares) + (Market value per preferred share x Number of preferred shares) 
= ($32 x 10 million) + ($20 x 20 million) 
= $640 million

Preferred stock weight = (20 x 20 million) / $640 million 
= 0.625 or 62.5%

Therefore, the weight used for preferred stock in the computation of TellAll's WACC is 48.43% (assuming a tax rate of 0%).

TellAll Has 10 Million Shares of Common Stock Outstanding, 20