Question

FarCry's industries, a maker of telecommunications equipment, has 5 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 20,000 bonds. suppose the common shares sell for $27 per share, the preferred shares sell for $14.50 per share, and the bonds sell for 98 percent of par. What weight should you use for preferred stock in the computation of FarCry's WACC?

Answer 1

Solution L No. of sharedommon Stock z 5 million Price of share of common stock = $27 per share Market value of common stock = 5,000,000 × $27 = $135,000,000 No. of shares of preferred Stock = 2 million Price of preferred share = $14.50 per share Mareket value of Preferred stoce 2,000,000x $14,50 - $ 29,000,000 No. of bonds = 20,000 Pore Value of bonds = $1,000 (Generally, the par value of bonds (corporate) is $1,000). selling Price of bonds = 98% of par value - 98 x $1000 - $ 980 Market value of bonds a 20,000 X $980 z $ 19,600,000

Total capital = 1. Market value of common stock of Market value Preferred Stock y Market value of bonds of z $ 135,000,000 + $ 29,000,000+ $19,600,000 = $183,600,000 · Calculating weight of Preferred stock in far cry's WACCH - Market value of Preferred Stock Total capital = $ 29,000,000 $183,600,000 = 0.1579 of Answer 15.79 %