If a company has $500 million face value of bonds, currently trading at 97, and market capitalization of $1,000, the weights to be used in the weighted average cost of capital are:

Question

Quizplus · Accepted Answer

The weights for the weighted average cost of capital (WACC) calculation are based on the market values of debt and equity. The market value of the bonds is $500 million * 0.97 = $485 million. The total market value of the firm is the sum of the market value of debt and equity, which is $485 million (debt) + $1,000 million (equity) = $1,485 million. The weight of debt is $485 million / $1,485 million = 0.327, and the weight of equity is $1,000 million / $1,485 million = 0.673.

If a Company Has $500 Million Face Value of Bonds