Question

OMG Inc. has 6 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 7,000 bonds. Suppose the common shares are selling for $28 per share, the preferred shares are selling for $27 per share, and the bonds are selling for 108 percent of par.


What weight should you use for debt in the computation of OMG’s WACC? (Round your answer to 2 decimal places.)


Weight used %

Answer 1

Answer:

Weight of debt = 2.43%

Explanation:

A corporate bond usually has a par of $1,000; so a bond trading at a 108% of its par value means that the bond is trading at a market value of $1,080 ($1,000 par x 108%).

Now we can calculate the values of each investments.

Value of debt = $1080 market value x 7,000 bonds

Value of debt = $7,560,000

Value of common equity = 6,000,000 shares x $28 per share

Value of common equity = $168,000,000

Value of preferred equity = 5,000,000 shares x $27 per share

Value of preferred equity = $135,000,000

Now, in order to calculate weight of debt (WD) we need to divide it by total capital.

WD= Debt/(debt + common equity + preferred equity)

$WD=7,560,000/(7,560,000+168,000,000+135,000,000)$

Weight of debt = 2.43%

Note: All values are rounded off to two decimal points