Question

your boss asks you to look at east africa airways. it has debt with a book value of $20m, currently trading at 85% of book value. it also has book value of equity of $30m, and 2m shared of common stock tracing at $4.75 per share. what weights should be used for debt ad equity in calculating its wacc?

Answer 1

To calculate the WACC for East Africa Airways, you need to determine the weights of debt and equity. The weight of debt is 40% and the weight of equity is 60%.

Step-by-step explanation:

In order to calculate the weighted average cost of capital (WACC) for East Africa Airways, we need to determine the weights of debt and equity. The weights are calculated by dividing the book value of each component by the total book value of the company. Here's the calculation:

1. Weight of Debt:
2. Debt = $20 million
3. Total Book Value = $20 million + $30 million = $50 million
4. Weight of Debt = Debt / Total Book Value = $20 million / $50 million = 0.4 or 40%
5. Weight of Equity:
6. Equity = $30 million
7. Total Book Value = $20 million + $30 million = $50 million
8. Weight of Equity = Equity / Total Book Value = $30 million / $50 million = 0.6 or 60%