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Assume the total market value of General Motors (GM) is $10 billion. GM has a market...

Assume the total market value of General Motors (GM) is $10 billion. GM has a market value of $6 billion of equity and a face value of $12 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?

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Answer #1

In WACC calculation, equity and debts are valued at market values. Book values are not relevant in this case

Total market value of General Motors GM) = $10,000,000,000

Market Value of Equity = $6,000,000,000

Market Value of Debt = $10,000,000,000 - $6,000,000,000 = $4,000,000,000

Weight of Equity = Market vaue of equity / Total market value = $6,000,000,000 / $10,000,000,000 = 0.6 = 60%

Weight of Debt = Market vaue of Debt / Total market value = $4,000,000,000 / $10,000,000,000 = 0.4 = 40%

Therefore, Weights of Equity and Debt in WACC calculation are 60% and 40% respectively

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