Asterix Corp has debt with a book value of $20 million,currently trading at 85% of book value.It also has book value of equity of $30 million,and 2 million shares of common stock trading at $4.75 per share.What weights should Asterix use for debt and equity in calculating its WACC?
A)0.64,0.36
B)0.4,0.6
C)0.68,0.32
D)0.5,0.5
E)0.6,0.4

Question

Quizplus · Accepted Answer

The correct weights are 0.64 for debt and 0.36 for equity. This is because the debt is trading at 85% of book value, which means that the market value of the debt is $20 million * 0.85 = $17 million. The market value of the equity is 2 million shares * $4.75 per share = $9.5 million. The total market value of the firm is $17 million + $9.5 million = $26.5 million. The weight of debt is $17 million / $26.5 million = 0.64, and the weight of equity is $9.5 million / $26.5 million = 0.36.

Asterix Corp Has Debt with a Book Value of $20