OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $21 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 111 percent of par ($1,000), what weight should you use for debt in the computation of OMG's WACC?
A) 32.74 percent
B) 29.86 percent
C) 25.79 percent
D) 21.86 percent

Question

Quizplus · Accepted Answer

To calculate the weight of debt in the WACC, first determine the market value of each component. The market value of debt is 50,000 bonds * $1,110 (111% of $1,000) = $55,500,000. The market value of common stock is 4,000,000 shares * $21 = $84,000,000. The market value of preferred stock is 3,000,000 shares * $10 = $30,000,000. The total market value is $55,500,000 + $84,000,000 + $30,000,000 = $169,500,000. The weight of debt is $55,500,000 / $169,500,000 = 32.74%.

OMG Inc Has 4 Million Shares of Common Stock Outstanding, 3