Question

The calculation of WACC involves calculating the weighted average of the required rates of return on debt and equity, where the weights equal the percentage of each type of financing in the firm's overall capital structure. Is is the symbol that represents the required rate of return on common stock in the weighted average cost of capital (WACC) equation. Ts Co. has $2.3 million of debt, $1 million of preferred stock, and $2.2 million of common equity. What would be its weight on debt?

Answer 1

rs is the symbol that required rate of return on common stock in the weighted average cost of capital equation.

Total firm capital= $2.3 + $1 + $2.2= 5.50 million.

Weight of debt in the capital structure= Debt in the firm/ Total firm capital

   = $2.3 million/ 5.50 million

  

   = 0.4182.

The weight on debt is 0.4182 $\rightarrow$ 0.42.

Hence, the answer is option a.

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