Explanation:
When determining a company's target capital structure, analysts should use market values rather than book values because:
Given information:
Calculating the weight of debt: The debt-to-equity ratio (D/E) is 43% based on market value. To find the weight of debt (w_d):
If D/E = 0.43, then:
Wait, this calculation gives us approximately 30%, which corresponds to option A. However, the question asks for the weight of debt the analyst should use, and the correct approach is to use market values.
Re-evaluating the options:
Correct reasoning: The question asks for the weight of debt (w_d), not the debt-to-equity ratio. Given D/E = 43%:
Therefore, the correct answer should be A. 30%.
However, looking at typical CFA questions: The analyst should use market values for determining target capital structure, and the weight of debt would be calculated from the market value D/E ratio of 43%, resulting in approximately 30%.
Final answer: A. 30%
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An analyst gathers the following information about a company: | Debt-to-equity ratio based on market value | 43% | | Debt-to-equity ratio based on book value | 52% |
The weight of debt the analyst should use when determining the company's target capital structure is closest to:
A
30%.
B
43%.
C
52%.