Question

Carrie D's has 8 million shares of common stock outstanding, 6 million shares of preferred stock outstanding, and 30 thousand bonds. If the common shares are selling for $12 per share, the preferred shares are selling for $30 per share, and the bonds are selling for 110 percent of par, what would be the weight used for equity in the computation of Carrie D's WACC

Answer 1

Answer:

Weight of equity = 0.31067 or 31.067%  or   96/309

Explanation:

WACC or weighted average cost of capital is the cost of a firm's capital structure which can comprise of debt, preferred stock and common equity. The WACC for a firm can be calculated as follows,

WACC = wD * rD * (1-tax rate)  +  wP * rP  +  wE * rE

Where,

• w represents the weight of each component based on market value in the capital structure

• r represents the cost of each component

• D, P and E represents debt, preferred stock and common equity respectively

To calculate the weight of equity in WACC computation, we first need to find out the Market value(MV) of each component and the market value of the overall capital structure.

MV of common equity = 8 million shares * 12 per share

MV of common equity = $96 million

MV of Preferred stock = 6 million shares * 30 per share

MV of Preferred stock = $180 million

The bonds are usually have a par value of $1000 unless specified otherwise.

MV of debt = 30 thousand * $1000 * 110%

MV of debt = $33 million

MV of total capital Structure = 96 + 180 + 33  => $309 million

Weight of equity = 96 / 309

Weight of equity = 0.31067 or 31.067%  or   96/309