Question

MV Corporation has debt with market value of $ 102 ​million, common equity with a book value of $ 95 ​million, and preferred stock worth $ 17 million outstanding. Its common equity trades at $ 49 per​ share, and the firm has 6.1 million shares outstanding. What weights should MV Corporation use in its​ WACC?

Answer 1

Answer:

Weight of Debt that is = 24.40 %

Weight of Equity = 71.52 %

Weight of Preferred Stock = 4.07 %

Explanation:

given data

market value Debt = $102 ​million

book value = $95 ​million

preferred stock = $ 17 million

common equity = $49 per​ share

shares outstanding = 6.1 million

to find out

What weights should MV Corporation use

solution

we get here first Market Value of Equity that is express as

Market Value of Equity = share Outstanding × common equity     ...............1

put here value

Market Value of Equity = 6.1 million × 49

Market Value of Equity =  $298.9 million

and now we get here Total Market Value that is

Total Market Value = Market Value + Market Value of Equity +  Preferred Stock    ...........2

put here value we get

Total Market Value = $102 million + $298.9 million + $17 million

Total Market Value = $417.9 million

so now we get

Weight of Debt that is = $\frac{market\ value\ debt}{Total\ Market\ Value}$

Weight of Debt that is = $\frac{102}{417.9}$

Weight of Debt that is = 0.2440 = 24.40 %

and

Weight of Equity = $\frac{market\ value\ equity}{Total\ Market\ Value}$

Weight of Equity = $\frac{298.9}{417.9}$

Weight of Equity = 0.7152 = 71.52 %

so

Weight of Preferred Stock = $\frac{preferred\ stock}{Total\ Market\ Value}$

Weight of Preferred Stock = $\frac{17}{417.9}$

Weight of Preferred Stock =  0.04067 = 4.07 %