The following market information was gathered for the ACME corporation

The following market information was gathered for the ACME corporation. The common stock is selling for $40.00 per share and there are 100,000 shares outstanding.

Retained earnings equal $400,000, preferred stock has 1,000 shares outstanding selling at $120.00 per share, and 500 outstanding long-term bonds are selling for $1,035.00 each. For purposes of estimating the firm’s WACC, what are the market value weights of long-term debt, preferred stock, and equity?
A) D/V = 11.16%, PS/V = 2.59%, and E/V = 86.25%
B) D/V = 10.27%, PS/V = 2.38%, and E/V = 87.34%
C) D/V = 10.78%, PS/V = 3.08%, and E/V = 86.14%
D) D/V = 33.33%, PS/V = 33.33%, and E/V = 33.33%

ANSWER

Answer: A
Explanation: A) E = $40 × 100,000 shares = $4,000,000, P = $120 × 1,000 shares = $120,000, D = $1,035 × 500 bonds = $517,500. E/V = $4,000,000/$4,637,500 = 86.25%, P/V = $120,000/$4,637,500 = 2.59%, D/V = $517,500/$4,637,500 = 11.16%.