Paper Exchange has 80 million shares of common stock outstanding, 60 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $20 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 105 percent of par, what would be the weight used for preferred stock in the computation of Paper's WACC?
A) 26.64%
B) 27.27%
C) 33.33%
D) 42.84%

Question

Quizplus · Accepted Answer

To compute the weight of preferred stock in the WACC formula, we need to compare it with the market value of the total financing of the firm.

Market value of common stock = 80 million shares x $20 per share = $1.6 billion
Market value of preferred stock = 60 million shares x $10 per share = $600 million
Market value of bonds = 50,000 x 1.05 = $52.5 million

Total market value of financing = $2.1525 billion

Weight of preferred stock = ($600m / $2.1525bn) x 100% = 27.86%

Therefore, the correct answer is not available. However, the closest option is A) 26.64%.

Paper Exchange Has 80 Million Shares of Common Stock Outstanding