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?


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


calculated as: 20/(20+40)*9% + 40/(20+40)*11%