Question

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 Marme's component ht of Equity Farcry mdustries, a maker of telecommunications equipment, Equity FarCry Industries, a maker ofte ulion shares of common stock outstanding, 1 million shares of preferred outstanding, and 10,000 bonds. If the common shares are selling for share the preferred shares are selling for $14.50 per share, and the bonds lling for 98 percent of par, what would be the weight used for equity in the omputation of FarCry's WACC? (LG11-4) Weight of Equity OMG Inc. has 4 million shares of common stock outstanding, 3 million shares of preferred stock outstanding, and 5,000 bonds. If the common shares are selling for $17 per share, the preferred shares are selling for $26 per share, and the bonds are selling for 108 percent of par, what would be the weight used for equity in the computation of OMG's WACC? (LG11-4) Weight of Debt FarCry Industries, a maker of telecommunications equipment, has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $14.50 per share, and the bonds are selling for 98 percent of Pal, What weight should you use for debt in the computation of FarCry's WACC? (LG11-4 CHAP

OMG Inc.

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 = W_e* K_e + W_p*K_p + W_d*K_d

where W_e= weight of equity Ke= Cost of equity

W_d= Weight of debt K_d= Cost of Debt

W_p= Weight of preferred stock K_p=  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%