A company has target values of debt, preferred and common of $23MM, $16MM and $8

Question

A company has target values of debt, preferred and common of $23MM, $16MM and $85MM. It has book values of debt, preferred and common of $66MM, $7MM and $18MM. It also has liquidation values of debt, preferred and common of $38MM, $19MM and $6MM. What weights should it use for purposes of estimating WACC?

Debt 18.6%; Preferred 12.9%; Common 68.5%

Debt 72.5%; Preferred 7.7%; Common 19.8%

Debt 60.3%; Preferred 30.2%; Common 9.5%

Debt 23.4%; Preferred 46.2%; Common 31.4%

Debt 18.6%; Preferred 12.9%; Common 68.5%

Debt 72.5%; Preferred 7.7%; Common 19.8%

Debt 60.3%; Preferred 30.2%; Common 9.5%

Debt 23.4%; Preferred 46.2%; Common 31.4%

Explanation / Answer

Answer:

for estimating WACC , the firm must always use target values of Debt and equity,

So total of Target Debt and equity = 23 + 16 + 85 = 124

% of Debt = 23 / 124 = 18.54 %

% of common equity = 85 / 124 = 68.5 %

% of preferred equity = 16 / 124 = 12.9 %

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