Question

Wiley Wilds has 1200 bonds outstanding that are selling for $990 each. The firm also has 2500 shares of preferred stock at a price of $28 per share. The common stock has a price of $37 per share with 28,000 shares outstanding. Find the weight of the common stock that you would use in the weighted average cost of capital (WACC). OA. 5296 B. 4596 C. 50% D.43%

Answer 1

Below is the table for the calculations:

Capital Source	Number	Price	Value	Weight
Debt	1200	990	$1,188,000	0.52 or 52%
Preference stock	2500	28	$70,000	0.03 or 3%
Common stock	28000	37	$1,036,000	0.45 or 45%
			$2,294,000	1 or 100%

Value = Price x number Value Debt = 990 x 1200 Value Debt = 1188000 Value Preference stock = 28 x 2500 Value Preference stock = 70000 Value Common Equity = 37 x 28000 V alueCommon Equity = 1036000

Total Value = sum of all the values

Total Value = 1188000+70000+1036000 = 2294000

Now we calculate the weights:

Value Weight = Total Value Value Debt x 100 Weight Debt = 2294000 1188000 Weight Debt = 2294000 x 100 Weight Debt = 52% Value preference stock x 100 Weight Preference stock = - 2294000 70000 Weight Preference stock = 29940001 x 100 Weight Preference stock = 3.00% ValueCommon Equity x 100 WeightCommon Equity = 2294000 1036000 WeightCommon Equity = 2294000 X 100 WeightCommon Equity = 45%

So the weight of common equity is 45% and the correct option is option B