Paper Exchange has 80 million shares of common stock outstanding, 60 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $20 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 105 percent of par, what would be the weight used for preferred stock in the computation of Paper's WACC?

To calculate the weight used for preferred stock in the computation of Paper Exchange's Weighted Average Cost of Capital (WACC), we'll follow these steps:

1. **Calculate the Market Value of Common Stock**:
   \[
   \text{Market Value of Common Stock} = \text{Number of Common Shares} \times \text{Price per Common Share}
   \]
   \[
   = 80 \, \text{million shares} \times 20 \, \text{\$/share} = 1600 \, \text{million dollars}
   \]

2. **Calculate the Market Value of Preferred Stock**:
   \[
   \text{Market Value of Preferred Stock} = \text{Number of Preferred Shares} \times \text{Price per Preferred Share}
   \]
   \[
   = 60 \, \text{million shares} \times 10 \, \text{\$/share} = 600 \, \text{million dollars}
   \]

3. **Calculate the Market Value of Debt (Bonds)**:
   \[
   \text{Market Value of Debt} = \text{Number of Bonds} \times \text{Price per Bond as a Percentage of Par}
   \]
   \[
   = 50 \, \text{thousand bonds} \times 1000 \, \text{\$/bond} \times 1.05 = 52.5 \, \text{million dollars}
   \]

4. **Calculate the Total Market Value of the Firm**:
   \[
   \text{Total Market Value} = \text{Market Value of Common Stock} + \text{Market Value of Preferred Stock} + \text{Market Value of Debt}
   \]
   \[
   = 1600 \, \text{million dollars} + 600 \, \text{million dollars} + 52.5 \, \text{million dollars} = 2252.5 \, \text{million dollars}
   \]

5. **Calculate the Weight of Preferred Stock**:
   \[
   \text{Weight of Preferred Stock} = \frac{\text{Market Value of Preferred Stock}}{\text{Total Market Value of the Firm}}
   \]
   \[
   = \frac{600 \, \text{million dollars}}{2252.5 \, \text{million dollars}} \approx 0.2664 \text{ or } 26.64\%
   \]

So, the weight used for preferred stock in the computation of Paper Exchange's WACC is **26.64%**.

Would you like any further details or have any questions?

Here are some related questions you might find interesting:

1. How do you calculate the cost of equity in the WACC formula?
2. Why is the market value used instead of book value in WACC calculations?
3. How do changes in interest rates affect the market value of bonds?
4. What impact does a high WACC have on a company's investment decisions?
5. Can you explain how to calculate the cost of preferred stock?

**Tip:** When calculating WACC, always use market values instead of book values to ensure that the weights reflect the current cost of capital.

Learn how to calculate the weight of preferred stock in the Weighted Average Cost of Capital (WACC) computation for Paper Exchange. Understand the steps involved, including valuing common stock, preferred stock, and bonds. Get insights into financial analysis with this detailed explanation.

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