High School

We appreciate your visit to Question 1 OMG Incorporated has 4 million shares of common stock outstanding 3 million shares of preferred stock outstanding and 5 000 bonds Suppose the. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!

**Question 1:**
OMG Incorporated has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 5,000 bonds. Suppose the common shares sell for $18 per share, the preferred shares sell for $17 per share, and the bonds sell for 108 percent of par. What weight should you use for preferred stock in the computation of OMG's WACC?
*Note: Round your answer to 2 decimal places.*

**Question 2:**
JB Company has a capital structure of 70 percent equity and 30 percent debt. Its before-tax cost of debt is 11 percent, while its cost of equity is 15 percent. Assume the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield. What will be JB's WACC?
*Note: Round your answer to 2 decimal places.*

Answer :

The weight that should be used for preferred stock in the computation of OMG's WACC is 0.415. The JB's WACC is 10.5%.

The weight to use for the preferred stock in the computation of OMG's WACC will be calculated as follows;

To get the weight of preferred stock, we add up the market value of the common stock, the market value of the preferred stock, and the market value of debt.

Then we divide the market value of the preferred stock by the sum of the market value of the common stock, the market value of the preferred stock, and the market value of debt.

Weight of preferred stock = Market value of preferred stock / (Market value of preferred stock + Market value of common stock + Market value of debt)

Market value of preferred stock = Number of preferred shares × Price per share = 3 million shares × $17 per share = $51 million

Market value of common stock = Number of common shares × Price per share = 4 million shares × $18 per share = $72 million

Market value of debt = Number of bonds × Bond price = 5,000 bonds × 108% = $540,000

Weight of preferred stock = $51 million / ($51 million + $72 million + $540,000) = 0.415.

The weight to use for preferred stock in the computation of OMG's WACC is 0.42. (Rounded to 2 decimal places).

For JB Company, Equity = 70%, Debt = 30%, Before-tax cost of debt = 11%, Cost of equity = 15%, Tax rate = 21%

With this information, JB's WACC can be calculated as follows.

WACC = (Equity / (Equity + Debt)) × Cost of Equity + (Debt / (Equity + Debt)) × (1 - Tax rate) × Before-tax cost of Debt = (0.7 × 15%) + (0.3 × (1 - 21%) × 11%) = 0.105 or 10.5%.

Therefore, JB's WACC will be 10.5%. (Rounded to 2 decimal places).

Learn more about interest tax shield here: https://brainly.com/question/31598766

#SPJ11

Thanks for taking the time to read Question 1 OMG Incorporated has 4 million shares of common stock outstanding 3 million shares of preferred stock outstanding and 5 000 bonds Suppose the. We hope the insights shared have been valuable and enhanced your understanding of the topic. Don�t hesitate to browse our website for more informative and engaging content!

Rewritten by : Barada