Electronics Galore has 950,000 shares of common stock outstanding at a market price of $38 a share.The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value.What weight should be given to the debt when the firm computes its weighted average cost of capital?

Question

Quizplus · Accepted Answer

To calculate the weight of debt, we need to calculate the total market value of the firm's debt and equity.

Total market value of equity = 950,000 shares × $38 per share = $36,100,000

Total market value of debt = 40,000 bonds × 1.06 × $1,000 (face value) = $42,400,000

Total market value of the firm = $36,100,000 + $42,400,000 = $78,500,000

Weight of debt = ($42,400,000 / $78,500,000) × 100% = 53.98%, which can be rounded to 54%.

Therefore, the answer is D) 54 percent.

Electronics Galore Has 950,000 Shares of Common Stock Outstanding at a Market