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ABC Corporation: Weight of Debt; weight of common stock;

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ABC Corporation has $5 million of long-term debt, $1 million of preferred stock, and $5 million of common stock on its balance sheet. The market value of the debt is 80% of the book value, the market value of preferred stock is 70% of book value, and the market value of common stock is 130% of book value. The after-tax costs of existing debt, existing preferred stock, and existing common stock are 6%, 9%, and 15%, respectively.

a) What is the weight of debt?

b) What is the weight of common stock?

c) What is the weighted average cost of existing capital?

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This solution is comprised of a detailed explanation to answer what the weight of debt is.

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Weight of Debt

ABC Corporation has $5 million of long-term debt, $1 million of preferred stock, and $5 million of common stock on its balance sheet. The market value of the debt is 80% of the book value, the market value of preferred stock is 70% of book value, and the market value of ...

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