The total market value of General Motors (GM)is $10 billion.GM has a market value of $7 billion of equity and a face value of $10 billion of debt.What are the weights in equity and debt that are used for calculating the WACC?
A)0.6,0.4
B)0.7,0.3
C)0.3,0.7
D)0.5,0.5
E)0.4,0.6

Question

Quizplus · Accepted Answer

The weights in equity and debt are calculated as follows:
Equity weight = Market value of equity / Total market value = $7 billion / $10 billion = 0.7
Debt weight = Face value of debt / Total market value = $10 billion / $10 billion = 1. Therefore, the total weights add up to more than 1 which indicates an error in the question. A reasonable assumption could be that the debt weight should be calculated using the market value of debt instead of the face value, which would result in a debt weight of 0.3. Thus, the best choice is B with weights of 0.7 for equity and 0.3 for debt.

The Total Market Value of General Motors (GM)is $10 Billion