Question

Accessory Industries has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $22 per share, the preferred shares are selling for $10.50 per share, and the bonds are selling for 96 percent of par ($1,000), what would be the weights used in the calculation of Accessory's WACC for common stock, preferred stock, and bonds, respectively

Answer 1

Common Stock = 29.2%

Preferred Stock = 7%

Bonds = 63.8%

Step-by-step explanation:

Weights used in the WACC are based on the market value of the each capital option. Market value can be calculated by multiplying the numbers of shares or bonds with respective market value of each. Dividing these market values by the total capital will result in the weight of each capital.

Market Value

Common stock = Numbers of common stock shares x market value of each share = 2,000,000 x $22 = $44,000,000

Preferred stock = Numbers of common stock shares x market value of each share =1,000,000 x $10.5 = $10,500,000

Bond = Numbers of Bonds x market value of Bond =100,000 x ( $1,000 x 96% ) = $96,000,000

Weights = Market value / Total Capital

Total Capital = $44,000,000 + $10,500,000 + $96,000,000 = $150,500,000

Common Stock = $44,000,000 / $150,500,000 = 0.292 = 29.2%

Preferred Stock = $10,500,000 / $150,500,000 = 0.07 = 7%

Bonds = $96,000,000 / $150,500,000 = 0.638 = 63.8%

Answer 2

Equity is 0.29

Debt is 0.64

Preferred stock 0.07

Step-by-step explanation:

WACC=Ke*E/V+Kd*D/V*(1-t)*Kp*P/V

However, the requirements of the question is weights of the bonds,equity and preferred stock which are E/V,D/V and P/V respectively

E is the value of equity=2,000,000*$22=$44,000,000

D is the value of debt =100,000*$1000*96%=$96,000,000

P is the value of prefered stock=1,000,000*$10.50=$10,500,000

Total firm's finance(V) $150,500,000

E/V=$44,000,0000/$150,500,000=0.29

D/V=$96,000,0000/$150,500,000=0.64

p/v=$10,500,000/$150,500,000=0.07