Question

OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 5,000 bonds. Suppose the common shares sell for $16 per share, the preferred shares sell for $15 per share, and the bonds sell for 109 percent of par. What weight should you use for preferred stock in the computation of OMG's WACC? (Round your answer to 2 decimal places.) Weight used 1%

Answer 1

The weight used for preferred stock in the computation of WACC is calculated as follows:

Weight used = Preferred stock / Total available fund *100

= $45 / $98.45 * 100

= 45.71%

Where,

Preferred stock = Number of stock outstanding * Price per share

= 3 Million * $15

= $45 Million

Total available fund = Common stock + Preferred stock + Bond value

= $48 Million + $45 Million+ 5.45 million

= $98.45

Where,

Common Stock = Common stock outstanding * Price per share

= 4 Million * $16

= 48 Million

Bond value = Number of bond issued * value per bond

= 5,000 *$1,000 * 109%

= $5,450,000 or 5.45 million

Note: It is assumed that par value of bond is $1,000.