1
What weights should Jefferson use when computing the firm’s weighted average cost of capital
We should always prefer Market Value over Book Value
Weight of debt = (Short-term debt + Long-term debt)/Total Capital
= (1,221,000+11,927,000)/ 39,318,000 = 33.44%
Weight of Equity = Common Equity/ Total Capital
= 26,170,000/39,318,000 = 66.55%
Weights based on market value
Liabilities = 33.44%
Equity = 66.55%
2
=
- Debt ratio =
= 0.75
Interest bearing debt ratio =
= =
= 0.5
b)
Debt ratio =
=
= 33.33%
c) The bank will consider the book value of the firm as it helps in analyzing its ability to pay off the loan
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