Company X has 2 million shares of common stock outstanding at a book value of $2.00 per share.The stock trades for $3.00 per share.It also has $2 million in face value of debt that trades at 90% of par.What is its ratio of debt to value for WACC purposes?

Question

Quizplus · Accepted Answer

The market value of the common stock is 2 million shares x $3 per share = $6 million. The market value of the debt is 90% x $2 million = $1.8 million. Therefore, the total market value of the firm is $6 million + $1.8 million = $7.8 million. The ratio of debt to value is $1.8 million / $7.8 million = 23.1%.

Company X Has 2 Million Shares of Common Stock Outstanding