Question

Assume JUP has debt with a book value of $24 million, trading at 120% of par value. The firm has book equity of $28 million, and 2 million shares trading at $20 per share. What weights should JUP use in calculating its WACC?A) 33.49 % for debt, 66.51% for equityB) 29.30 % for debt, 70.70 % for equityC) 37.67% for debt, 62.33 % for equityD) 41.86 % for debt, 58.14% for equity

Answer 1

Answer:

Option (D) 41.86 % for debt, 58.14% for equity

Explanation:

Market value of debt = $24 million × 120%

= $24 million × 1.20

= $28.8 million

Market value of equity = 2 million shares × $20 per share

= $40 million

Therefore,

Total = $28.8 million + $40 million

= $68.8 million

Therefore ,

Weight of Debt = [ Market value of debt ÷ Total ] × 100%

= [ $28.8 million ÷ 68.8 million ] × 100%

= 41.86%

Weight of Equity = [ Market value of equity ÷ Total ] × 100%

= [ $40 million ÷ 68.8 million ] × 100%

= 58.14%

Hence,

Option (D) 41.86 % for debt, 58.14% for equity