Accessory Industries has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $22 per share, the preferred shares are selling for $10.50 per share, and the bonds are selling for 96 percent of par ($1000), what would be the weights used in the calculation of Accessory's WACC for common stock, preferred stock, and bonds, respectively?
A) 33.33%, 33.33%, 33.33%
B) 29.23%, 6.98%, 63.79%
C) 64.52%, 32.26%, 3.22%
D) 17.12%, 8.17%, 74.71%

Question

Quizplus · Accepted Answer

Common stock weight = (number of common shares x price per share) / (total market value of equity)
= (2,000,000 x $22) / [(2,000,000 x $22) + (1,000,000 x $10.50)]
= 44,000,000 / 67,000,000
= 0.6567 or 65.67%

Preferred stock weight = (number of preferred shares x price per share) / (total market value of equity)
= (1,000,000 x $10.50) / [(2,000,000 x $22) + (1,000,000 x $10.50)]
= 10,500,000 / 67,000,000
= 0.1567 or 15.67%

Bond weight = (number of bonds x bond price) / (total market value of debt)
= (100,000 x $960) / [(100,000 x $1000 x 0.96)]
= 96,000,000 / 96,000,000
= 1 or 100%

Therefore, the weights are: 29.23% for common stock, 6.98% for preferred stock, and 63.79% for bonds, which is option B.

Accessory Industries Has 2 Million Shares of Common Stock Outstanding