FarCry Industries, a maker of telecommunications equipment, has 5 million shares

Question

FarCry Industries, a maker of telecommunications equipment, has 5 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 20,000 bonds. Suppose the common shares sell for $26 per share, the preferred shares sell for $14.00 per share, and the bonds sell for 97 percent of par.

What weight should you use for preferred stock in the computation of FarCry’s WACC?

FarCry Industries, a maker of telecommunications equipment, has 5 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 20,000 bonds. Suppose the common shares sell for $26 per share, the preferred shares sell for $14.00 per share, and the bonds sell for 97 percent of par.

Explanation / Answer

Let Face Value of Bond = $100

Bond sells at 97% of par

therefore Market value of bond = 100*97% = $97

Weight of Preferred stock = (Market Cap of Preferred stock)/(Total Market Cap)

= 28,000,000/159,940,000 = 17.5%

Type No. of Shares Price Market Cap Weight Common Stock 5000000 26 130000000 0.813 Preference Stock 2000000 14 28000000 0.175 Bonds 20000 97 1940000 0.012 TOTAL 159940000 1

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