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(Weighted average cost of capital—weights) A company has the following right-hand side of its balance sheet: Bonds...

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Finance

(Weighted average cost of capital—weights) A company has thefollowing right-hand side of its balance sheet:
Bonds payable = $250,000

Preferred stock (1000 shares) = $100,000

Common stock (200,000 shares) = $400,000

--------------------------------------------------------------

Total Liabilities + Equity = $750,000
Bonds payable are currently priced at 115 (115% of face value) inthe market, preferred stock is selling at $70 per share, and commonstock is selling at $20 per share. Management has announced that itis targeting a capital structure composed of 65% debt and 35%equity. Of the equity, 10% is to be preferred stock, with theremainder common stock. Calculate the weights to be used in theweighted average cost of capital calculation if the weights arebased on:

a. The company’s book values

b. The company’s market values

c. Management’s target capital structure

d. If management’s target weights were not known, which of theother two weighting schemes would you use? Why?

Answer & Explanation Solved by verified expert
3.7 Ratings (469 Votes)
I have assumed the face value of 1 bond to be 1000 This assumption is immaterial for the final answer But we need this for intermediate calculation Please see the table below Please be guided by the second row to understand the mathematics    See Answer
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