Question

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 $25 per share, the preferred shares sell for $13.50 per share, and the bonds sell for 97 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.)

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=25*3000000

=75000000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*10000*0.97

=9700000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=13.5*1000000

=13500000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=75000000+9700000+13500000

=98200000

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 13500000/98200000

W(PE)=0.1375