Given are the following data for Vinyard Corporation: $\begin{array}{c|c}
\text { Vinyard Corporation }& \text { Liquidating values, \$Millions) }\
\hline\text { Asset Value }\$ 1.500 &\$ 750 \text { Debt }\
--- & \$ 750 \text { Equity }\
\$ 1.500 &\$ 1.500
\end{array}$ $\begin{array}{c|c}
\text { Vinyard Corporation }&\text { (Book values, \$Millions) }\
\hline\text { Asset Value }\$ 2,500 & \$ 1.000 \text { Debt }\
--- & \$ 1.500\text { Equity }\\
\$ 2,500&\$ 2.500
\end{array}$ $\begin{array}{c|c}
\text { Vinyard Corporation }&\text { (Market values, \$Millions) }\
\hline\text { Asset Value }\$ 4.000 & \$ 1.000 \text { Debt }\
--- & \$ 3.000\text { Equity }\\
\$ 4.000 & \$ 4.000
\end{array}$ $\begin{array}{c|c}
\text { Vinyard Corporation }& \text { Liquidating values, \$Millions) }\
\hline\text { Asset Value }\$ 1.500 &\$ 750 \text { Debt }\
--- & \$ 750 \text { Equity }\
\$ 1.500 &\$ 1.500
\end{array}$ Calculate the proportions of debt (D/V) and equity (E/V) that you would use for estimating Vinyard's weighted average cost of capital (WACC).
A)40 percent debt and 60 percent equity
B)50 percent debt and 50 percent equity
C)25 percent debt and 75 percent equity
D)75 percent debt and 25 percent equity

Question

Given are the following data for Vinyard Corporation: $\begin{array}{c|c}
\text { Vinyard Corporation }&  \text { Liquidating values, \$Millions) }\
\hline\text { Asset Value }\$ 1.500 &\$ 750 \text { Debt }\
--- & \$ 750 \text { Equity }\
\$ 1.500 &\$ 1.500
\end{array}$ $\begin{array}{c|c}
\text { Vinyard Corporation }&\text { (Book values, \$Millions) }\
\hline\text { Asset Value }\$ 2,500 & \$ 1.000 \text { Debt }\
--- & \$ 1.500\text { Equity }\\
\$ 2,500&\$ 2.500
\end{array}$ $\begin{array}{c|c}
\text { Vinyard Corporation }&\text { (Market values, \$Millions) }\
\hline\text { Asset Value }\$ 4.000 & \$ 1.000  \text { Debt }\
--- & \$ 3.000\text { Equity }\\
\$ 4.000 & \$ 4.000
\end{array}$ $\begin{array}{c|c}
\text { Vinyard Corporation }&  \text { Liquidating values, \$Millions) }\
\hline\text { Asset Value }\$ 1.500 &\$ 750 \text { Debt }\
--- & \$ 750 \text { Equity }\
\$ 1.500 &\$ 1.500
\end{array}$ Calculate the proportions of debt (D/V) and equity (E/V) that you would use for estimating Vinyard's weighted average cost of capital (WACC).
A)40 percent debt and 60 percent equity
B)50 percent debt and 50 percent equity
C)25 percent debt and 75 percent equity
D)75 percent debt and 25 percent equity

Quizplus · Accepted Answer

The proportion of debt and equity that a company uses to calculate its WACC depends on its capital structure, which should reflect the risk profile of the company. In this case, Vinyard Corporation's market value reveals that it consists of 75 percent equity and 25 percent debt. As a result, we should use a similar capital structure to calculate its WACC. Thus, choice C, 25 percent debt and 75 percent equity, would be the best option to use when estimating Vinyard's WACC.

Given Are the Following Data for Vinyard Corporation