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44,000 shares of common stock outstanding at a market price of $32 a share. The common stock will pay a $1.50 annual dividend and has a dividend growth rate of 3.5 percent. There are 7,500 shares of 9% preferred stock outstanding at a market price of $92 a share. The outstanding bonds mature in 11 years, have a total face value of $825,000, a coupon rate of 6.5 percent, a face value per bond of $1,000, and a market price of $989 each. The tax rate is 35 percent. What is the weight of equity in to be use to calculate the firm's WACC?

User Meules
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2 Answers

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Final answer:

The weight of equity is calculated as the market value of the common stock divided by the total market value of the firm.

Step-by-step explanation:

The weight of equity is important in calculating the firm's weighted average cost of capital (WACC). The WACC is a measure used to determine the cost of capital for a company.

It is calculated by using the proportion of equity and debt in the company's capital structure weighted by their respective costs.

To calculate the weight of equity, you need to know the market value of the common stock and the total market value of the firm. In this case, the market value of the common stock is 44,000 shares * $32 per share = $1,408,000.

The total market value of the firm is the sum of the market values of the common stock, preferred stock, and bonds, which is $1,408,000 + (7,500 shares * $92 per share) + (825 bonds * $989 per bond) = $9,845,125.

The weight of equity can then be calculated as the market value of the common stock divided by the total market value of the firm, which is $1,408,000 / $9,845,125 = 0.143 or 14.3%.

User Isaac Adni
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4 votes

Answer:

The weight of equity in to be use to calculate the firm's WACC is 0.48 or 48%

Step-by-step explanation:

The weight of equity to be used in firm's WACC computation is market value of equity divided by the sum of market value of equity ,preferred stock and bonds.

Market value of equity=44,000*$32 =$1,408,000.00

Market value of preferred stock=7,500*$92 =$690,000

Market value of bonds=$825,000*$989/$1000=$815,925.00

Sum of market values =$ 2,913,925.00

Weight of equity=market value of equity/ Sum of market values=$1,408,000.00/$2,913,925.00= 0.48 =48%

User Captainsac
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