FarCry Industries, a maker of telecommunications equipment, has 3 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares sell for $27 per share, the preferred shares sell for $14.50 per share, and the bonds sell for 98 percent of par. What weight should you use for preferred stock in the computation of FarCry’s WACC? (Round your answer to 2 decimal places.)
Weight of Preferred stock is 13.77% or 0.1377
| Step-1:Calculation of value of each component of capital and total value of capital | |||||||||
| Value of shares of common stock | = | Number of shares | * | selling price per share | |||||
| = | 30,00,000 | * | $ 27.00 | ||||||
| = | $ 8,10,00,000 | ||||||||
| Value of shares of preferred stock | = | Number of shares | * | selling price per share | |||||
| = | 10,00,000 | * | $ 14.50 | ||||||
| = | $ 1,45,00,000 | ||||||||
| Value of bonds | = | Number of bonds | * | Value per bond | |||||
| = | 10,000 | * | ($ 1000*98%) | ||||||
| = | $ 98,00,000 | ||||||||
| Value of total capital | = | Value of shares of common stock | + | Value of shares of preferred stock | + | Value of bonds | |||
| = | $ 8,10,00,000 | + | $ 1,45,00,000 | + | $ 98,00,000 | ||||
| = | $ 10,53,00,000 | ||||||||
| Step-2:Calculation of weight of preferred stock in computation of FarCry's WACC | |||||||||
| Weight of preferred stock | = | Value of preferred stock | / | Total value of capital | |||||
| = | $ 1,45,00,000 | / | $ 10,53,00,000 | ||||||
| = | 13.77% | ||||||||
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