For Question 1: Book value of long-term debt/total assets 28.6% Book value of equity/total assets 71.4% Market value of long-term debt/market value of company 23.1% Market value of equity/market value of company 76.9% Cost of equity 13.0% Marginal tax rate 35.0% They use the market value of long-term debt/market value instead of the book value of long-term debt/market value to calculate the WACC. This tripped me up and it seems so basic! Why do you use market value of debt/equity ratio instead of book value of debt/equity ratio to compute WACC?
its always market value. It is mentioned in books.
ok. It’s one of those things that’s so basic it tripped me up.
i guess think about what the WACC is trying to do. It is trying to figure out how much is capital going to cost a company if they take out another loan (either thru debt or equity) So the next dollar the company wants to borrow, if you are the investor, are you going to require market value, or some lower value determined by the company’s books?
which sample is this on, i dont remember the Q