Question

Town Crier has 10 million shares of common stock outstanding. 2 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $28 per share the preferred shares are selling for $15.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for debt in the computation of Town Crier's WACC? Multiple Choice O

A. 30 percent
B. 312 percent
C. 3.20 percent
D. 3.33 percent

Answer 1

3.02%

Step-by-step explanation:

The computation of the weightage of debt is shown below:

= Debt value ÷ total firm value

where,

Debt value would be

= 10,000 × $1,000 × 0.97

= $9.7 million

We assume the par value is $1,000

Equity value

= 10 million shares × $28

= $280 million

And, the preferred shares would be

= 2 million shares × $15.50

= $31 million

So, the total firm value would be

= $9.7 million + $280 million + $31 million

= $320.70 million

Now the weightage would be

= $9.7 million ÷ $320.70 million

= 3.02%