BetterPie Industries has 3 million shares of common stock outstanding, 2 million

ID: 2613421 • Letter: B

Question

BetterPie Industries has 3 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10,000 bonds. Assume the common shares are selling for $45 per share, the preferred shares are selling for $22.50 per share, and the bonds are selling for 98 percent of par.

What would be the weights used in the calculation of BetterPie’s WACC? (Do not round intermediate calculations and round your answers to 2 decimal places.)

Explanation / Answer

Weighted Average Cost of Capital uses target weights (i.e target capital structure). Howevr when target weights are not given we calculate weights based on market value.

Instrument

Number

Market Price

Market Value

Calculation

Weight

Equity Stock

3000000

135000000

135000000/189800000

71.12%

Preferred Stock

2000000

22.50

45000000

45000000/189800000

23.71%

Debt

10000

98% of 1000 (1000 is face value )

9800000

9800000/189800000

5.17%

Total Capital

189800000

100%