Question

The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure.

  is the symbol that represents the before-tax cost of debt in the weighted average cost of capital (WACC) equation.

Bryant Co. has $1.1 million of debt, $3 million of preferred stock, and $2.2 million of common equity. What would be its weight on common equity?

0.43

0.38

0.35

0.53

Answer 1

Total Value= Debt + Preferred Stock + Common Equity

= $ ( 1.1 + 3+2.2) Million

= $ 6.3 Million

Weight of Common equity = Value of common equity / Total Value

= $ 2.2 Million /$ 6.3 Million

= 0.35

Hence the correct answer is 0.35