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The Auto Group has 1,000 bonds outstanding that are selling for $900 each. The company also...

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Finance

The Auto Group has 1,000 bonds outstanding that are selling for$900 each. The company also has 8,900 shares of preferred stock ata market price of $45 each. The common stock is priced at $40 ashare and there are 35,000 shares outstanding. What is the weightof the preferred stock as it relates to the firm's weighted averagecost of capital?

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4.3 Ratings (650 Votes)

Debt in the firm’s capital structure= $900*1,000= $900,000

Preference shares in the firm’s capital structure= $45*8,900= $400,500

Equity in the firm’s capital structure= $40* 35,000= $1,400,000

Total firm capital= $900,000 + $400,500 + $1,400,000

                                 = $2,700,500.

Weight of preference shares = $400,500/ $2,700,500

                                                 = 0.1483*100

                                                 = 14.83%.

In case of any query, kindly comment on the solution.
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Transcribed Image Text

The Auto Group has 1,000 bonds outstanding that are selling for$900 each. The company also has 8,900 shares of preferred stock ata market price of $45 each. The common stock is priced at $40 ashare and there are 35,000 shares outstanding. What is the weightof the preferred stock as it relates to the firm's weighted averagecost of capital?

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