Question

For purposes of estimating the firm's WACC, what are the weights of long-term debt, preferred stock, and equity given the following information from the balance sheet: The value of common stock is $60,000, retained earnings equal $40,000, total common equity equals $100,000, preferred stock has a value of $10,000 and long-term debt totals $120,000.

Answer 1

Answer and Explanation:

The computation is shown below;

Total value is

= Value of debt + Value of preferred stock + Value of equity

= $120,000 + $10,000 + $100,000

= $230,000

Now

Weight of debt is

= Value of debt ÷ Total value of firm

= $120,000 ÷ $230,000

= 0.52 or 52.17%

The Weight of preferred stock is

= Value of preferred stock ÷ Total value of the firm

= $10,000 ÷ $230,000

= 4.35%

And,

The Weight of equity is

= Value of equity ÷ Total value of the firm

= $100,000 ÷ $230,000

= 43.48%