Billy Burger Corp has a market value of debt of $245 million,and a market value of equity of $815 million.What weights should Billy Burger use for debt and equity in calculating its WACC?
A)0.30,0.70
B)0.23,0.77
C)0.70,0.30
D)0.5,0.5
E)0.6,0.4

Question

Quizplus · Accepted Answer

The weights of debt and equity should be based on their market values.

Weight of Debt = Market Value of Debt / (Market Value of Debt + Market Value of Equity) 
= $245 million / ($245 million + $815 million) 
= 0.23

Weight of Equity = Market Value of Equity / (Market Value of Debt + Market Value of Equity) 
= $815 million / ($245 million + $815 million) 
= 0.77

Therefore, the weights that Billy Burger should use for debt and equity in calculating its WACC are 0.23 and 0.77, respectively. Choice B is the only option that matches these weights.

Billy Burger Corp Has a Market Value of Debt of $245