Sports Corp has 10 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 1 million bonds. If the common shares are selling for $25 per share, the preferred share are selling for $12.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for equity in the computation of Sports's WACC?

Question

Quizplus · Accepted Answer

To calculate the weight of equity, we need to first calculate the total market value of equity.
Market value of common stock = 10 million shares * $25 = $250 million
Market value of preferred stock = 5 million shares * $12.50 = $62.5 million
Total market value of equity = $250 million + $62.5 million = $312.5 million

Weight of equity = (Total market value of equity / Total market value of firm) * 100%
To calculate the total market value of the firm, we need to add the market value of equity and the market value of debt.
Market value of bonds = 1 million * $1,000 * 0.97 = $970,000
Total market value of firm = $312.5 million + $970,000 = $313.47 million

Weight of equity = ($312.5 million / $313.47 million) * 100% = 99.69%
Therefore, the weight used for equity in the computation of Sports's WACC is 19.49% (100% - 99.69%). The best choice is B.

Sports Corp Has 10 Million Shares of Common Stock Outstanding