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11. (Weighted average cost of capital-weights) A company has the following right-hand side of its balance sheet: Bonds payable $100,000 Preferred stock (250 shares) 25,000
11. (Weighted average cost of capital-weights) A company has the following right-hand side of its balance sheet: Bonds payable $100,000 Preferred stock (250 shares) 25,000 Common stock (100,000 shares) 75,000 Total Liabilities / Equity $200,000 Bonds payable are currently priced at 85 (85% of face value) in the market, preferred stock is selling at $110 per share, and common stock is selling at $5 per share. Management has announced that it is targeting a capital structure composed of 40% debt and 60% equity. Of the equity, 15% is to be preferred stock with the remainder common stock. Calculate the weights to be used in the weighted average cost of capital calculation if the weights are based on: a. The company's book values Bonds Preferred Stock Common Stock b. The company's market values Bonds Preferred Stock Common Stock c. Management's target capital structure Bonds Preferred Stock Common Stock d. Which of the above three alternatives is best? Why
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