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

The weight used for equity in the computation of FarCry's WACC is 78.8%.

Step-by-step explanation:

To determine the weight used for equity in the computation of FarCry's WACC (Weighted Average Cost of Capital), we need to calculate the market value of the common stock. The market value of the common stock is calculated by multiplying the number of common shares outstanding by the market price per share. In this case, FarCry has 2 million common shares outstanding and they are selling for $26 per share. Therefore, the market value of the common stock is 2,000,000 x $26 = $52,000,000.

The weight used for equity in the WACC formula is calculated by dividing the market value of the common stock by the total market value of the firm's capital structure. The total market value of the capital structure can be calculated by adding the market value of the common stock, the market value of the preferred stock, and the market value of the bonds.

Given that the market value of the common stock is $52,000,000, the market value of the preferred stock is 1,000,000 x $14 = $14,000,000, and the market value of the bonds is 10,000 x 0.97 = $9,700, the total market value of the capital structure is $52,000,000 + $14,000,000 + $9,700 = $66,009,700.

Therefore, the weight used for equity in the computation of FarCry's WACC is $52,000,000 / $66,009,700 = 0.788 (or 78.8%).