Question

Assume Lavender Corporation has a market value of $4 billion of equity and a market value of $19.8 billion of debt. What are the weights in equity and debt that are used for calculating the WACC?A) 0.168 , 0.832B) 0.832, 0.168C) 0.10 , 0.90D) 0.90 , 0.10

Answer 1

A) 0.168 , 0.832

Step-by-step explanation:

The weights can be calculated as follows,

Weight of Equity = Equity / Total investment

Weight of Debt = 1 - weight of equity

We can calculate them as,

Weight of equity = 4 / (4 + 19.8) = 0.168 = W1

Weight of debt = 1 - 0.168 = 0.832 = W2

These are the weights to be used in WACC

WACC = W1 * return on equity + W2 *return on debt * (1 - Tax)

Hope that helps.