Question
The WACC computation requires you use the weighted average of the after tax cost of debt and the cost of equity, using proportions for debt
The WACC computation requires you use the weighted average of the after tax cost of debt and the cost of equity, using proportions for debt and equity. Your firm's balance sheet shows $30m of debt and $70m of equity. the market value of the equity is $120m. The new project is different from the exisitng projects that the firm has invested in; other firms that have investments similair to the new project tend to use a mix of 20% debt and 70% equity. Which of the following opinions should you use computing WACC?
a. You should follow the firm's current financing practice, but use 30:90 because the market value is a better measure of your firms equity value than book value
b. You should use 20:80 b/c that's appropriate financing for the current project; the firm's current financing practice is irrelevant.
c.Use an equally weighted average of the two.
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