Suppose a firm has 10.4 million shares of common stock outstanding with a par value of $1 per share. The current market price per share is $12. The firm has outstanding debt with a par value of $56 million selling at 102% of par. What capital structure weight would you use for debt when calculating the firm's WACC?

Question

Quizplus · Accepted Answer

The weight of debt in the firm's capital structure is calculated by dividing the market value of the debt by the total market value of the firm's financing (equity + debt). The market value of the debt is $56 million * 102% = $57.12 million. The market value of equity is 10.4 million shares * $12 = $124.8 million. Therefore, the total market value of financing is $57.12 million + $124.8 million = $181.92 million. The weight of debt is $57.12 million / $181.92 million = 0.314.

Suppose a Firm Has 10