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27 July, 09:59

Assume JUP has debt with a book value of $24 million, trading at 120% of par value. The firm has book equity of $28 million, and 2 million shares trading at $20 per share. What weights should JUP use in calculating its WACC? A) 33.49 % for debt, 66.51% for equityB) 29.30 % for debt, 70.70 % for equityC) 37.67% for debt, 62.33 % for equityD) 41.86 % for debt, 58.14% for equity

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  1. 27 July, 10:19
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    Option (D) 41.86 % for debt, 58.14% for equity

    Explanation:

    Market value of debt = $24 million * 120%

    = $24 million * 1.20

    = $28.8 million

    Market value of equity = 2 million shares * $20 per share

    = $40 million

    Therefore,

    Total = $28.8 million + $40 million

    = $68.8 million

    Therefore,

    Weight of Debt = [ Market value of debt : Total ] * 100%

    = [ $28.8 million : 68.8 million ] * 100%

    = 41.86%

    Weight of Equity = [ Market value of equity : Total ] * 100%

    = [ $40 million : 68.8 million ] * 100%

    = 58.14%

    Hence,

    Option (D) 41.86 % for debt, 58.14% for equity
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