FarCry Industries, a maker of telecommunications equipment, has 6 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares are selling for $27 per share, the preferred shares are selling for $15 per share, and the bonds are selling for 119% of par ($1000), what weight should you use for debt in the computation of FarCry's WACC?
A) 4.93%
B) 5.07%
C) 5.81%
D) 6.30%

Question

Quizplus · Accepted Answer

To calculate the weight of debt in the WACC formula, we need to find the total market value of debt.

Total market value of debt = Number of bonds × Market value per bond = 10,000 × 1.19 × $1,000 = $11,900,000

Total market value of equity = Number of common shares × Market value per share + Number of preferred shares × Market value per share = 6,000,000 × $27 + 1,000,000 × $15 = $177,000,000

The total value of the firm = Total market value of debt + Total market value of equity = $11,900,000 + $177,000,000 = $188,900,000

Weight of debt = Total market value of debt / Total value of the firm = $11,900,000 / $188,900,000 = 0.06296 or 6.30%

Therefore, the answer is D, 6.30%.

FarCry Industries, a Maker of Telecommunications Equipment, Has 6 Million