Question

The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure. is the symbol that represents the before-tax cost of debt in the weighted average cost of capital (WACC) equation. Avery Co. has $1.4 million of debt, $1.5 million of preferred stock, and $2.1 million of common equity. What would be its weight on common equity? 0.42 0.28 0.33 0.27

Answer 1

Answer:

The weightage of common equity will be 0.42

Explanation:

The weight of each component of financing to the firm is calculated by taking the market value of each component and dividing it by the total market value of the assets of the firm. Where assets = debt + equity

The total assets or value of capital structure for the firm is,

Assets = 1.4 + 1.5 + 2.1  = $5 million

The weightage of common equity in the capital structure is, 2.1 / 5  =  0.42 or 42%