if both market values of debt and equity are given, and book values of debt and equity are given.
Which ones do you rely on to compute wacc?
example:
MV of debt: 20 MV of equity: 40 Book Value of debt: 30 Book value of Equity: 30 after tax cost of debt: 9% cost of equity: 11% WACC??
use market values
Market values. In fact at some instances the formula is quoted as
WACC = MVD/V x Rd(1-t) + MVE/V x Re
Quiz: Looking at the formula above and since your goal is to have as low a WACC as possible, and since Rd < Re, why not set MVD/V to 1? … or if you must have some equit then set MVD/V = 0.9999!
cost of financial distress, thus the static trade-off theory
WACC=10.3%
calculated as: 20/(20+40)*9% + 40/(20+40)*11%