Question

MV Corporation has debt with market value of $ 101 ​million, common equity with a book value of $ 100 ​million, and preferred stock worth $ 20 million outstanding. Its common equity trades at $ 51 per​ share, and the firm has 5.7 million shares outstanding. What weights should MV Corporation use in its​ WACC?

Answer 1

Weight of debt = 0.2453 or 24.53%

Weight of preferred stock = 0.0486 or 4.86%

Weight of common equity = 0.7061 or 70.61%

Step-by-step explanation:

The WACC or weighted average cost of capital is the cost of a firm's capital structure. The capital structure of a company can consist of one or more of the following components namely debt, preferred stock and common stock.

To calculate the WACC, we use the market value of each component.

• The market value of debt is$101 million.
• The market value of common equity is 290.7 million
• The value of preferred stock is $20 million

Market value of common equity = 51 * 5.7 = 290.7 million

The weights to assigned to each components are,

Total weight of all components = 101 + 20 + 290.7 = 411.7 million

Weight of debt = 101 / 411.7 => 0.2453 or 24.53%

Weight of preferred stock = 20 / 411.7 => 0.0486 or 4.86%

Weight of common equity = 290.7 / 411.7 => 0.7061 or 70.61%