FarCry Industries a maker of telecommunications equipment ha

FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 4 million shares of preferred stock outstanding, and 45,000 bonds. Suppose the common shares are selling for $28 per share, the preferred shares are selling for $15.00 per share, and the bonds are selling for 99 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.)

Solution

WACC is weighted average cost of capital. It is mathematically represented as:

WACC = Weight of debt * Cost of debt * (1 - tax rate) + Weight of common equity * Cost of common equity + Weight of preferred equity * Cost of preferred equity

Weights used in this formula are based on their market values (and not book value). Market value weights adequately capture the risks in market that are curretnly being watched out by the market.

So, in this question, you would, for equity, use 6,000,000 * $28 = $168,000,000 as value of equity

Similaly, value of preferred stock = 4,000,000 * $15 = $60,000,000

Now, on assumption that I am making here is that bond is worth $1000 par value. This means, it is currently selling at $990 (99% of par). So, market value of bonds = 990 * 45,000 = 44,500,000

Therefore, total capital = 168 mil + 60 mil + 44.55 mil = 272.55 mil

Weight fo Common Equity = 168/272.55 = 61.64%

{Weight of preferred equity = 60/272.55 = 22.01%; Weight of debt = 44.55/272.55 = 16.35%}