You have been given the following facts and assumptions concerning ABC Corp. at

Question

You have been given the following facts and assumptions concerning ABC Corp. at December 31, 2013. Yield to maturity on long term government bond is 5.00%. Yield to maturity on company long term government bond is 7.0%.Coupon rate on company long term bond is 7.0%.Market price of risk is 8.0% along with estimated company beta value of 1.5.Stock is selling for $40 in the market and 250 million shares are outstanding. Assuming that book value of equity is $5240 million along with book value of interest bearing debt of $1250 million. Existing tax rate stands at 35%.Given all the information estimate the appropriate weight of equity to be used when calculating ABC Corp s weighted average cost of capital.

Explanation / Answer

Note: Nothing is mentioned on which WACC needs to be calculate, so I am assuming Market Value Weight as it is more appropriate.

Market value of Equity = 40 x 250 = $10,000 million
Market Value of Debt = 1,250*7%/7% = $1,250 million
Total value of firm = value of debt + value of equity = 10000 + 1250 = $11,250
Appropriate weight of equity = 10000/11,250 = 0.89 or 89%

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