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11-10 Weight of Equity, please show formula on excel.

011) as 2 million share stock outstanding $27 per share, the preferred 100 percent Wildl would be Marmes component ht of Equ

OMG Inc.
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Answer #1

WACC or "Weighted average cost of capital" or "Overall cost of capital" is the calculation of firm's cost of capital in which each category of capital is proportionately weighted.

WACC = We* Ke + Wp*Kp + Wd*Kd

where We= weight of equity Ke= Cost of equity

Wd= Weight of debt Kd= Cost of Debt

Wp= Weight of preferred stock Kp=  Cost of preferred stock

The weights can be assigned on three bas is:

1) Historical weight- which can be Book value or market value weights

2) Marginal weight - these are weights incase of new financing

3) Target Weight- These are the weights as expected by company

a) To calculate the weight of equity, we will find the capital structure of the firm

Capital structure= Total equity + Total preferred stock + Total debt

= 2,000,000* 27 + 1,000,000* 14.50 + 10,000* 0.98 * 1000 (par value)

= 54,000,000 + 14,500,000 + 9,800,000 = $ 78,300,000

Cost of Equity = 2,000,000* 27 = $54,000,000

Weight of Equity = $54,000,000/ $ 78,300,000 = 0.6896 or 68.96%

b)  To calculate the weight of equity, we will find the capital structure of the firm

Capital structure= Total equity + Total preferred stock + Total debt

= 4,000,000* 17 + 3,000,000* 26 + 5,000* 108% * 1000 (par value)

= 68,000,000 + 780,00,000 + 5,400,000 = $ 151,400,000

Cost of Equity = 4,000,000* 17 = $68,000,000

Weight of Equity = $68,000,000/ $ 151,400,000 = 0.4491 or 44.91%

c)  To calculate the weight of debt, we will find the capital structure of the firm

Capital structure= Total equity + Total preferred stock + Total debt

= 2,000,000* 27 + 1,000,000* 14.50 + 10,000* 98% * 1000 (par value)

= 54,000,000 + 14,500,000 + 9,800,000 = $ 78,300,000

Cost of Debt = 10,000* 98% * 1000 (par value) = $ 9,800,000

Weight of Debt = $ 9,800,000/ $ 78,300,000 = 0.1251 or 12.51%

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