[earnmoremoney]

Can someone assist me as to how to approach this problem:

Suppose a firm has 12.2 million shares of common stock outstanding with a par value of $1.00 per share. The current market price per share is $15.50. The firm has outstanding debt with a par value of 72.0 million selling at 101% of par. What weight would you use for debt when computing the WACC?

I am lost as to where to begin. Pleas advise.

Thanks.

EM

[ArcSine]

In order for the WACC to give an economically meaningful measure, you want to weight the individual capital structure components by their relative market values.

If I have a bond issue outstanding that's currently trading at $1,500,000 (total) and outstanding stock with a market value of $750,000, the WACC weights for the debt and for the equity are 2/3 and 1/3, respectively.

Hence neither the face value nor the original issue price of the debt is relevant---unless of course the debt is so recently-issued that it's still trading at, or very near, its issue price.