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. Mitchell Co. has $2.3 million of debt, $2.5 million of preferred stock, and $1.8 million of common equity. What would be its weight on preferred stock?

Answer 1

Answer:

37.88 %

Explanation:

The weight on preferred stock mean, what percentage out of the Total Market Value of the Sources of Capital pooled together is taken by Preferred Stock.

Weight on preferred stock = Market Value of Preferred Stock / Total Market Value of Sources of Capital x 100

where,

Market Value of Preferred Stock = $2.5 million

and

Total Market Value of Sources of Capital :

Debt                            $2.3 million

Preferred Stock         $2.5 million

Common Equity          $1.8 million

Total                            $6.6 million

therefore,

Weight on preferred stock = $2.5 million / $6.6 million x 100 = 37.88 %