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Town Beverage has 8 million shares of common stock outstanding, 6 million shares of preferred stock...

Town Beverage has 8 million shares of common stock outstanding, 6 million shares of preferred stock outstanding, and 5 thousand bonds. If the common shares are selling for $20 per share, the preferred shares are selling for $10 per share, and the bonds are selling for 105 percent of par, what would be the weight used for preferred stock in the computation of Town Beverage's WACC?

A. 26.64% B. 27.27% C. 29.85% D. 33.33% E. 42.84%

Echo Sound has 4 million shares of common stock outstanding, 500,000 shares of preferred stock
outstanding, and 45,000 bonds. If the common shares are selling for $28.50 per share, the preferred shares
are selling for $38.75 per share, and the bonds are selling for 96.85 percent of par, what would be the weight
used for debt in the computation of Echo Sound's WACC?
A. less than 22.70 percent
B. more than 22.70 percent but less than 24.15 percent
C. more than 24.15 percent but less than 25.60 percent
D. more than 25.60 percent but less than 27.05 percent
E. more than 27.05 percent

Solutions

Expert Solution

Answer to Question 1:

“26.64%”

Debt:

Number of bonds outstanding = 5,000
Par Value = $1,000

Current Price per bond = 105% * Par Value
Current Price per bond = 105% * $1,000
Current Price per bond = $1,050

Market Value of Debt = Current Price per bond * Number of bonds outstanding
Market Value of Debt = $1,050 * 5,000
Market Value of Debt = $5,250,000

Preferred Stock:

Number of shares outstanding = 6,000,000
Current Price per share = $10

Market Value of Preferred Stock = Number of shares outstanding * Current Price per share
Market Value of Preferred Stock = 6,000,000 * $10
Market Value of Preferred Stock = $60,000,000

Common Stock:

Number of shares outstanding = 8,000,000
Current Price per share = $20

Market Value of Common Stock = Number of shares outstanding * Current Price per share
Market Value of Common Stock = 8,000,000 * $20
Market Value of Common Stock = $160,000,000

Market Value of Firm = Market Value of Debt + Market Value of Preferred Stock + Market Value of Common Stock
Market Value of Firm = $5,250,000 + $60,000,000 + $160,000,000
Market Value of Firm = $225,250,000

Weight of Preferred Stock = Market Value of Preferred Stock / Market Value of Firm
Weight of Preferred Stock = $60,000,000 / $225,250,000
Weight of Preferred Stock = 0.2664 or 26.64%

Answer to Question 2:

“more than 24.15 percent but less than 25.60 percent”

Debt:

Number of bonds outstanding = 45,000
Par Value = $1,000

Current Price per bond = 96.85% * Par Value
Current Price per bond = 96.85% * $1,000
Current Price per bond = $968.50

Market Value of Debt = Current Price per bond * Number of bonds outstanding
Market Value of Debt = $968.50 * 45,000
Market Value of Debt = $43,582,500

Preferred Stock:

Number of shares outstanding = 500,000
Current Price per share = $38.75

Market Value of Preferred Stock = Number of shares outstanding * Current Price per share
Market Value of Preferred Stock = 500,000 * $38.75
Market Value of Preferred Stock = $19,375,000

Common Stock:

Number of shares outstanding = 4,000,000
Current Price per share = $28.50

Market Value of Common Stock = Number of shares outstanding * Current Price per share
Market Value of Common Stock = 4,000,000 * $28.50
Market Value of Common Stock = $114,000,000

Market Value of Firm = Market Value of Debt + Market Value of Preferred Stock + Market Value of Common Stock
Market Value of Firm = $43,582,500 + $19,375,000 + $114,000,000
Market Value of Firm = $176,957,500

Weight of Debt = Market Value of Debt / Market Value of Firm
Weight of Debt = $43,582,500 / $176,957,500
Weight of Debt = 0.2463 or 24.63%

jeff jeffy answered 2 months ago

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