Answer: 43%.

## Explanation When determining a company's target capital structure, analysts should use **market values** rather than book values because: 1. **Market values reflect current investor expectations** - They represent what investors are willing to pay for the company's securities today. 2. **Target capital structure is forward-looking** - It should reflect the company's optimal mix of financing based on current market conditions. 3. **Book values are historical** - They represent the original cost of assets and liabilities, which may not reflect current economic reality. 4. **Investment decisions are based on market values** - Investors make decisions based on current market prices, not historical accounting values. **Given information:** - Debt-to-equity ratio based on market value = 43% - Debt-to-equity ratio based on book value = 52% **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: - Let D = 0.43 - Let E = 1.00 - Total capital = D + E = 0.43 + 1.00 = 1.43 - Weight of debt (w_d) = D / (D + E) = 0.43 / 1.43 = 0.3007 ≈ 30% 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:** - Option A (30%): This is the weight of debt calculated from the market value D/E ratio of 43% - Option B (43%): This is the D/E ratio itself, not the weight of debt - Option C (52%): This is the book value D/E ratio **Correct reasoning:** The question asks for the **weight of debt** (w_d), not the debt-to-equity ratio. Given D/E = 43%: - w_d = D/(D+E) = (D/E) / (1 + D/E) = 0.43 / (1 + 0.43) = 0.43 / 1.43 = 0.3007 ≈ 30% 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%**

Author: LeetQuiz .