Question

MV Corporation has debt with market value of $ 102 ​million, common equity with a book value of $ 99 ​million, and preferred stock worth $ 19 million outstanding. Its common equity trades at $ 49 per​ share, and the firm has 5.8 million shares outstanding. What weights should MV Corporation use in its​ WACC?

Answer 1

The weights to be assigned to each component in WACC calculation is are,

Debt = 25.17%

Preferred stock = 4.69%

Common Stock = 70.14%

Step-by-step explanation:

The WACC or weighted average cost of capital is the cost to a firm of its capital structure which can contain the following components- debt, preferred stock and equity. To calculate the WACC, we use the market values of debt and equity in our calculation to assign weights to each component of the capital structure.

Market value of common shares = 49 * 5.8 million = $284.2 million

The total value of capital structure is = 284.2 + 102 + 19 = $405.2 million

The weights to be used in WACC calculation is:

Debt = 102 / 405.2 = 0.2517 or 25.17%

Preferred stock = 19 / 405.2 = 0.0469 or 4.69%

Common Stock = 284.2 / 405.2 = 0.7014 or 70.14%