Question

FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119 percent of par ($1,000), what weight should you use for debt in the computation of FarCry's WACC?

Answer 1

To calculate the weight for debt in FarCry's WACC, divide the market value of the bonds by the total market value of the firm's financing sources. The weight for debt is approximately 6.07%.

Step-by-step explanation:

In computing FarCry's WACC (Weighted Average Cost of Capital), the weight to be used for debt is calculated by dividing the market value of the debt by the total market value of the firm's financing sources. In this case, FarCry has 6 million common shares, 1 million preferred shares, and 10 thousand bonds. To calculate the weight for debt, we need to determine the market value of the bonds, which is calculated by multiplying the number of bonds (10 thousand) by the bond selling price (119% of par) and the par value ($1,000). So the market value of the bonds is $1,000 * 1.19 * 10,000 = $11,900,000. Now, we can calculate the weight for debt by dividing the market value of the bonds by the total market value of the firm's financing sources:

Weight for Debt = Market Value of Bonds / (Market Value of Common Shares + Market Value of Preferred Shares + Market Value of Bonds)

Market Value of Common Shares = Number of Common Shares * Market Price of Common Shares = 6 million * $27 = $162 million

Market Value of Preferred Shares = Number of Preferred Shares * Market

Price of Preferred Shares = 1 million * $15 = $15 million

Market Value of Bonds = $11,900,000

Weight for Debt = $11,900,000 / ($162,000,000 + $15,000,000 + $11,900,000) ≈ 0.0607 or 6.07%

Answer 2

Market value of common stock (6,000,000 x $27) =$162,000,000

Market value of preferred stock (1,000,000 X $15) = $15,000,000

Market value of debt (10,000 x $1,190) = $11,900,000

Market value of the company $188,900,000

Weight of debt in the capital structure

= $11,900,000/$188,900,000 x 100

= 6.299% = 6.30%

Step-by-step explanation:

In this case, there is need to calculate the market value of the company, which is the aggregate of market value of common stock, market value of preferred stock and market value of debt. The market value of each stock is obtained by multiplying the number of units outstanding by the current market price per stock. The weight of debt is determined by dividing the market value of debt by the market value of the company.