The following market information was gathered for the ACME corporation.The common stock is selling for $40.00 per share and there are 100,000 shares outstanding.Retained earnings equal $400,000,preferred stock has 1,000 shares outstanding selling at $120.00 per share,and 500 outstanding long-term bonds are selling for $1,035.00 each.For purposes of estimating the firm's WACC,what are the market value weights of long-term debt,preferred stock,and equity?
A)D/V = 11.16%,PS/V = 2.59%,and E/V = 86.25%
B)D/V = 10.27%,PS/V = 2.38%,and E/V = 87.34%
C)D/V = 10.78%,PS/V = 3.08%,and E/V = 86.14%
D)D/V = 33.33%,PS/V = 33.33%,and E/V = 33.33%

Question

Quizplus · Accepted Answer

The market value weights are calculated as follows:D/V = (Number of bonds outstanding * Market price per bond) / (Total market value of the firm)D/V = (500 * $1,035.00) / ($40.00 * 100,000 + $120.00 * 1,000 + $1,035.00 * 500)D/V = $517,500 / $4,517,500D/V = 11.16%PS/V = (Number of preferred shares outstanding * Market price per preferred share) / (Total market value of the firm)PS/V = (1,000 * $120.00) / ($40.00 * 100,000 + $120.00 * 1,000 + $1,035.00 * 500)PS/V = $120,000 / $4,517,500PS/V = 2.59%E/V = (Number of common shares outstanding * Market price per common share) / (Total market value of the firm)E/V = (100,000 * $40.00) / ($40.00 * 100,000 + $120.00 * 1,000 + $1,035.00 * 500)E/V = $4,000,000 / $4,517,500E/V = 86.25%

The Following Market Information Was Gathered for the ACME Corporation