Darden Inc. has $30 million in preferred stock and 15 million shares of common stock outstanding. The common stock is currently trading at $35 per share. The company also has some debt outstanding with a market value of $200 million. What weights should Darden use to calculate WACC?

Question

Darden Inc. has $30 million in preferred stock and 15 million shares of common stock outstanding.   The common stock is currently trading at $35 per share.   The company also has some debt outstanding with a market value of $200 million. What weights should Darden use to calculate WACC?

Quizplus · Accepted Answer

The correct weights are 74% equity and 24% debt. This is because the market value of the equity is $30 million + (15 million shares x $35 per share) = $525 million, and the market value of the debt is $200 million. Therefore, the total market value of the firm is $525 million + $200 million = $725 million. The weight of the equity is $525 million / $725 million = 74%, and the weight of the debt is $200 million / $725 million = 24%.