Question

Acme Manufacturing reports the following capital structure: long-term debt of $200; long-term leases of $300; convertible debt of $100; preferred stock $60; and common equity of $400. In its footnotes the company also reports $40 of stock options owned by its employees. Further research indicates that the market value of the long-term debt is 99% of its book value, the market value of the convertible debt is 109% of its book value (75% of this debt is debt-related with the remainder equity-related), the preferred stock is 99% of its book value, and the market value of the common equity is 235% of its book value. What should be the percentage (relative weight) of debt that should be included in WACC calculation?

Answer 1

	Book value	market value	Market value in $	weight%
long term debt	200	99%	198	0.123
lease	300	100%	300	0.187
convertible debt			0	0.000
equity	25	109%	27.25	0.017
debt	75	109%	81.75	0.051
preffered stock	60	99%	59.4	0.037
common stock	400	235%	940	0.585
			1606.4	1
relative weight of debt
long term debt	0.123
convertible debt (debt portion)	0.051
lease	0.187
	0.361

Assume prefferd stock is not debt ,employee stock option not exercised as it is given in foot note, not in financial statement and it will not form part of capital structure

percentage of increase to the equity component of debt only considerd as 109% insted of 235% as it is not part of common stock currently.