is AJC's current total market value and weighted average cost of capital?
A)$600,000; 7.5%
B)$600,000; 8.0%
C)$800,000; 7.0%
D)$800,000; 7.5%
E)$800,000; 8.0%

Question

Quizplus · Accepted Answer

The market value of AJC can be found by adding the market value of equity and the market value of debt. From the information given in the problem, we know that the market value of equity is $600,000 and the market value of debt is $200,000. Therefore, the total market value of AJC is $800,000 (Option C and E are eliminated).

The weighted average cost of capital (WACC) can be found by taking the weighted average of the cost of equity and the cost of debt. From the information given in the problem, we know that the cost of equity is 10% and the cost of debt is 5%. The weights of equity and debt are determined by their proportion in the total market value of AJC, which we have already calculated to be $800,000.

Weight of Equity = Market value of equity / Total market value = $600,000 / $800,000 = 0.75
Weight of Debt = Market value of debt / Total market value = $200,000 / $800,000 = 0.25

Therefore, the weighted average cost of capital (WACC) can be calculated as follows:

WACC = (Cost of Equity x Weight of Equity) + (Cost of Debt x Weight of Debt)
WACC = (0.10 x 0.75) + (0.05 x 0.25)
WACC = 0.075 or 7.5%

Hence, the best choice is D with a market value of $800,000 and a weighted average cost of capital of 7.5%.

Is AJC's Current Total Market Value and Weighted Average Cost