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Fairyland Inc. has 4 million shares of common stock outstanding, 1 million shares of preferred stock...

Fairyland Inc. has 4 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 200 thousand bonds. The common shares are selling for $25 per share, the preferred share are selling for $10 per share, and the bonds are selling for 95 percent of their $1,000 par. (See P10-3 for formula to calculate weights).

A. What would be the weight used for equity in the computation of FarCry’s WACC?

B. What weight should you use for debt in the computation of Fairyland ‘s WACC?

C. What weight should you use for preferred stock in the computation of Fairyland ‘s WACC?

Solutions

Expert Solution

No. of shares(common stock)= 4000000

Price per share 25

Value of Equity = no. of shares * price per share

4000000*25

=$100000000

No. of bonds 200000

Par value 1000

quoted price is 95% of par. it means 1000*95%= 950

Value of Debt = No. of Bonds * price per bond

950 * 200000

=$190000000

No. of Preference shares 1000000

Price per share 10

Value of Preference shares = No. of Preference shares*Price per share

1000000*10

=$ 10000000

Total amount of capital = Value of Equity + value of Bonds + Value of preference shares

100000000+190000000+10000000

$300000000

Weight of Equity = Value of Equity/Total capital

100000000/300000000

0.3333333333

Weight of debt = Value of debt/Total capital

190000000/300000000

0.6333333333

Weight of Preference = Value of Preference/Total capital

10000000/300000000

0.03333333333

So weight of Equity is 0.3333, weight of debt is 0.6334 and weight of Preference is 0.0333.

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jeff jeffy answered 6 months ago

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