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 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%

Debt 18.6%; Preferred 12.9%; Common 68.5%

Debt 72.5%; Preferred 7.7%; Common 19.8%

Explanation / Answer

Weight of X = Market value of X / Total Market Value
Market value is liquidation value

Total market value = 38+19+6 = 63
Debt = 38/63 = 60.3%
Preferred = 19/63 = 30.2%
Equity = 6/63 = 9.5%

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