Homework Answers
| Total Portfolio value = Value of Stock + Value of Debt + Value of Preferred stock |
| =1000000+1800000+200000 |
| =3000000 |
| Weight of Stock = Value of Stock/Total Portfolio Value |
| = 1000000/3000000 |
| =0.3333 |
| Weight of Debt = Value of Debt/Total Portfolio Value |
| = 1800000/3000000 |
| =0.6 |
| Weight of Preferred stock = Value of Preferred stock/Total Portfolio Value |
| = 200000/3000000 |
| =0.0667 |
| Weight of equity = E/A |
| Weight of equity = |
| W(E)=0.3333 |
| Weight of debt = D/A |
| Weight of debt = 0.6 |
| W(D)=0.6 |
| Weight of preferred equity =1-D/A-E/A |
| Weight of preferred equity = =1-0.6 - 0.3333 |
| W(PE)=0.0667 |
| After tax cost of debt = cost of debt*(1-tax rate) |
| After tax cost of debt = 8*(1-0.25) |
| = 6 |
| WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE) |
| WACC=6*0.6+12*0.3333+10*0.0667 |
| WACC =8.27% |
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Please include formulas in the answer. I need to understand how
to calculate the book and market values of debt and stock as shown
in the grey boxes.
Thank You!
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