Question

In calculating the weighted average cost of capital, if you had to use book values for either debt or equity, which would you choose? Why?

Answer #1

Please find below the solution.. let me know if you need any clarification.

WACC should be based on market weight. As market weights are more relastic to provide the details of the debt:equity mix. Book weights are based on the historic value of the asset and liabilities. Therefore it may not be very much meaningfull. Value of equity can be measured by the market price of the share multiplying by number of share. Same for the bond.

Therefore Mareket weight should be used to get better outcome.

Which is the more difficult input to estimate when calculating
the Weighted Average Cost of Capital (WACC), debt or equity?
Briefly explain why?

The proportions of debt and equity used in calculating the
weighted average cost of capital (WACC) should be ‘ideally’ based
on the current _______ weights of the individual components. A)book
value B)market value C)target value

Which information is NOT required when calculating the weighted
average cost of capital for a company with debt?
Its capital structure ratios
Its cost of debt
Its current ratio
Its tax rate

Which of the following is NOT a capital component when
calculating the weighted average cost of capital (WACC) for use in
capital budgeting?
a. Common stock
b. Notes Payable - Current
c. Inventory
d. Preferred stock

1.
Which of the following is not a capital component when
calculating the weighted average cost of capital (WACC)?
Marketable securities
Preferred stock
Long-term debt
Common equity
To help finance a major expansion, a company sold a noncallable
bond several years ago that now has 15 years to maturity. This bond
has a 10.25% annual coupon, paid semiannually, it sells at a price
of $985, and it has a par value of $1,000. If the company’s tax
rate is 10%,...

In the context of recent research on the Weighted Average Cost
of Capital (WACC), the Adjusted Present Value (APV) and the
Flow-to-Equity (FTE), which of these methods would you use for the
following companies (explain your choice).
b) A start-up firm with no debt.

In the context of recent research on the Weighted Average Cost
of Capital (WACC), the Adjusted Present Value (APV) and the
Flow-to-Equity (FTE), which of these methods would you use for the
following companies (explain your choice).
c) A start-up firm with debt.

Dickson, Inc., has a debt-equity ratio of 2.35. The firm's
weighted average cost of capital is 12 percent and its pretax cost
of debt is 9 percent. The tax rate is 24 percent.
What is the company's cost of equity capital?
What is the unlevered cost of equity capital?
What would the company's weighted average cost of capital be if
the company's debt-equity ratio were .75 and 1.35?
Please answer this in Excel, thank you

You are calculating the cost of capital for Drill Corp. The
firm's capital structure consisted of operating leases, two bonds,
and equity. The operating lease has a debt value of $500 million.
The first bond is a simple 30-year semiannual coupon paying bond
with a book value of $200 million and market value of $125 million.
The second is a zero-coupon bond with 10 years to maturity and $500
million face value. The firm's equity has a book value of...

What is the weighted average cost of capital of a company that
has debt of $8.505 million and equity of $11.143 million? The
average before-tax cost of debt is 7.30% per annum and the average
cost of equity is 10.10% per annum. The company tax rate is 30%.
Please use three methods – a mathematical formula,
SUMPRODUCT function and SUM array function, to compute the weighted
average cost of capital.

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