Timbuktu Corp has a market value of debt of $2.5 billion,and a market value of equity of $1.5 billion.What weights should Timbuktu use for debt and equity in calculating its WACC?
A)0.375,0.625
B)0.5,0.5
C)0.4,0.6
D)0.625,0.375
E)0.6,0.4

Question

Quizplus · Accepted Answer

The weights of debt and equity are calculated as:

Weight of debt = Market value of debt / (Market value of debt + Market value of equity) = 2.5 / (2.5 + 1.5) = 0.625

Weight of equity = Market value of equity / (Market value of debt + Market value of equity) = 1.5 / (2.5 + 1.5) = 0.375

Therefore, the answer is D) 0.625, 0.375.

Timbuktu Corp Has a Market Value of Debt of $2