Question

FarCry Industries, a maker of telecommunications equipment, has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares are selling for $26 per share, the preferred shares are selling for $14.00 per share, and the bonds are selling for 97 percent of par.


What would be the weight used for equity in the computation of FarCry’s WACC? (Round your answer to 2 decimal places.)

Answer 1

Answer:

87.18%

Explanation:

Equity = Common stock + Preferred stock.

We know, WACC = $W_{d} * K_{d} + W_{e} * K_{e}$

Equity can further be broken into two pieces = Common + Preferred.

In this case, as we do not have any rate of return. We will add all the equity and debt. Then divide the total equity by the total capital structure.

Total capital structure = Common stock + Preferred stock + debt

Total capital structure = 2,000,000 x $26 + 1,000,000 x $14 + 10,000 x 0.97 x $1,000

Total capital structure = $(52,000,000 + 14,000,000 + 9,700,000)

Total capital structure = $75,700,000

Total equity = 2,000,000 x $26 + 1,000,000 x $14 = $66,000,000

the weight would be used for equity in the computation of FarCry’s WACC

= $\frac{Total equity}{Total capital structure}$

= $\frac{66,000,000}{75,700,000}$

= 87.18%