Question

A firm is all-equity (it has no debt and no preferred stock). The weights of debt, equity and preferred [IN THAT ORDER] in the WACC are:

a) 1.0, 0.0, 0.0
b) 0.0, 1.0, 0.0
c) 0.0, 0.0, 1.0

Answer 1

0.0, 1.0, 0.0, reflecting the absence of debt and preferred stock in the WACC calculation for an all-equity firm.

Thus correct option is is b) 0.0, 1.0, 0.0.

Step-by-step explanation:

The given firm is all-equity, meaning it has no debt or preferred stock. Consequently, the weights of debt and preferred stock in the WACC equation are both zero. As the firm is financed entirely by equity, the weight of equity is 1.0. The WACC (Weighted Average Cost of Capital) equation incorporates the weights of the different components of capital structure (debt, equity, and preferred stock), multiplied by their respective costs of capital. In this scenario, as there's no debt or preferred stock, their weights are zero, resulting in the weights being 0.0 for debt and preferred stock, and 1.0 for equity. Thus, the correct answer is b) 0.0, 1.0, 0.0, reflecting the absence of debt and preferred stock in the WACC calculation for an all-equity firm.

Thus correct option is is b) 0.0, 1.0, 0.0.