Please someone help me! I saw a post this afternoon saying for WACC calculation, we need to use market value to determine the debt or equity weight and therefore we must use market share price * # of shares to derive equity. But in Book 7 Exam 3 AM question 37, we are given 1. total debt = 12 million (BS) 2. equity = 131 million (BS) 3. shares outstanding = 18.6 million (IS) 4. PV of future operating lease = 57 million (footnote) 5. current stock price = 15.5 per share (footnote) The solution says debt weight = (debt + op lease) / (debt + equity + op lease) = (12+57) / (12+131+57) I understand why we need to add op lease back but shouldn’t we use 15.5*18.6 = 288.3 rather than 131 as equity?
pretty sure we use the book value of equity rather than the current market price of equity
ilvino Wrote: ------------------------------------------------------- > pretty sure we use the book value of equity rather > than the current market price of equity for WACC it’s market value
if we use market cap as a measure of equity thats incorrect. D/A thats the formula for debt weighting and E/A for the equity weighting not Market cap/A… the reason why we need to add operating lease back is because its an adjustment for capitalising the lease.
i’m going to fail. is it because the current stock price reflects the cost of raising equity in the market?
oh man… someone shed some more light on this
http://www.investopedia.com/terms/w/wacc.asp Investopedia has the following explanation: WACC is calculated by multiplying the cost of each capital component by its proportional weight and then summing: WACC = E/V * Re + D/V * Rd(1-Tc) Where: Re = cost of equity Rd = cost of debt E = market value of the firm’s equity D = market value of the firm’s debt V = E + D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate
always use Market value for WACC
i’m going to bed.
ilvino Wrote: ------------------------------------------------------- > i’m going to fail. is it because the current > stock price reflects the cost of raising equity in > the market? yeah, that was my impression. WACC is the cost of capital so why use BV to determine it?
ahmad, Can you please explain why market value of equity != market cap? I think I’m fcked too :S
well what is the market value of a stock?
Normally, you use the Market Value of debt and equity to calculate WACC. However in this example you have no way to calculate market value of debt. I think the question is pretty ridiculous though. I’ve looked at numerous sources, and they all instruct to use market values
price of a stock = price for a part of equity= market value of the equity(if multiply by no of shares)
PeteyPete Wrote: ------------------------------------------------------- > always use Market value for WACC are u sure… please dont confuse me… from what ive learned in lvl 1 its ((D/A*after tax cost of debt) + (E/A* cost of equity).
yeah that’s correct formula but D and E are market values
I see what Ahmad is saying. If you are dividing by assets, you should use book values because the assets on the bs are definitely not market values
the assets are market value too. sorry i should have said D, E, and A
I’ve never used (shares * market price = invested equity)…anytime the question gives equity, I just follow orders. Maybe the post was using it in a different context?
its book < market < target and this was on the exam last year 