The Total Market Value of General Motors (GM)is $10 Billion

question 89

Multiple Choice

The total market value of General Motors (GM) is $10 billion.GM has a market value of $7 billion of equity and a face value of $10 billion of debt.What are the weights in equity and debt that are used for calculating the WACC?

• A)0.6,0.4
• B)0.7,0.3
• C)0.3,0.7
• D)cannot be determined

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Definitions:

Pure Rate of Interest

The rate of return on a risk-free investment, theoretically excluding the effects of inflation, default risk, and other factors.

Residual Claimants

Individuals or entities entitled to a share of an organization’s income only after all other claims, such as debts and taxes, have been satisfied.

Interest Rate

The cost of borrowing money, typically expressed as a percentage of the amount borrowed, paid to the lender.

MB = MC Rule

A principle in economics that states the optimal level of an activity is reached when the marginal benefit (MB) is equal to the marginal cost (MC).