Final answer:
To compute the weight for equity in WACC, you calculate the market values of common and preferred stock, and bonds. Our computations indicate the weight for equity should be 70.79%. However, the computed weight does not match any given options, suggesting an error in the provided choices or assumptions.
Step-by-step explanation:
To compute the weight used for equity in the Weighted Average Cost of Capital (WACC), we need to determine the market value of common stock, preferred stock, and bonds. Then compute the total market value and calculate the weights.
The market value of the common stock is:
- 5.7 million shares × $4.70 per share = $26.79 million
The market value of the preferred stock is:
- 3.7 million shares × $16.7 per share = $61.79 million
The market value of the bonds is:
- 37 thousand bonds × 100% of par (assuming par value is $1,000 per bond) = $37 million × 98.83% = $36.57 million
The total market value is the sum of the market values:
- $26.79 million (common stock) + $61.79 million (preferred stock) + $36.57 million (bonds) = $125.15 million
The weight for equity is:
- ($26.79 million common stock + $61.79 million preferred stock) ÷ $125.15 million total market value = $88.58 million ÷ $125.15 million = 0.7079 or 70.79%
However, none of the answer choices matches the computed value. Therefore, there might be an error in the answer choices provided or in the assumptions made for the calculation (e.g., bond par value).