Assume JBH has debt with a book value of $20 million, trading at 120% of par value. The firm hasbook equity of $20 million, and 2 million shares trading at $18 per share. What weights should JBH use in calculating its WACC?

Question

Quizplus · Accepted Answer

To calculate the WACC, we need to determine the weights of debt and equity in the firm's capital structure. 
The book value of debt is $20 million, trading at 120% par value, so the market value of debt is:
$20 million x 120% = $24 million

To find the weight of debt:
Weight of Debt = Market Value of Debt / (Market Value of Debt + Market Value of Equity)
Weight of Debt = $24 million / ($24 million + (2 million shares x $18 per share))
Weight of Debt = $24 million / $60 million
Weight of Debt = 0.4 or 40%

To find the weight of equity:
Weight of Equity = Market Value of Equity / (Market Value of Debt + Market Value of Equity)
Weight of Equity = (2 million shares x $18 per share) / ($24 million + (2 million shares x $18 per share))
Weight of Equity = $36 million / $60 million
Weight of Equity = 0.6 or 60%

Therefore, the weights used in calculating the WACC are 40% for debt and 60% for equity, making choice B the best answer.

Assume JBH Has Debt with a Book Value of $20