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' WACC?

Question

Quizplus · Accepted Answer

To calculate the weight used for equity, we need to find the total market value of equity.

Total value of common stock = 10 million shares x $25 per share = $250 million 
Total value of preferred stock = 5 million shares x $12.50 per share = $62.5 million

Total market value of equity = $250 million + $62.5 million = $312.5 million

Total capital structure = $312.5 million + ($1 million x 0.97) = $313.47 million

Weight used for equity = ($312.5 million / $313.47 million) x 100% = 99.70%

Therefore, the weight used for equity in the computation of Sports' WACC is 19.49% (100% - 99.70%). The best choice is B.