Corporate Finance Q82

82Gaven Warren at California Investment Advisors wants to estimate the cost of capital for Semiactive Conductors as well as projected cash flows for two of their projects to determine the effect of these new projects on the value of Semiactive Conductors. Warren has gathered following information on Semiactive Conductors:

	Current ($) )	Target ($)
Book Value of Debt	62	62
Market Value of Debt	59	63
Book Value of Shareholder’s Equity	78	88
Market Value of Shareholder’s Equity	230	240

Weights that should be applied to estimating the cost of debt and equity capital for Semiactive Conductors respectively are:

Option : B
Explanation : Use the market values of debt and equity to calculate their weights. wd = $63 / ($63 + $240) = 0.208 we = $240 / ($63 + $240) = 0.792.

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