What Will Be the Effect of Using Book Value of Debt

question 88

Multiple Choice

What will be the effect of using book value of debt in WACC decisions if interest rates have decreased substantially since a firm's long-term bonds were issued?

• A)The debt-to-value ratio will be overstated
• B)The debt-to-value ratio will be understated
• C)There will be no effect on WACC decisions
• D)Cannot be determined without knowing interest rates Example
• Market Value of Equity = $5 million
• Book Value of Debt = $2 million
• Value of Firm = $7 million

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