A company's historical target capital structure is 40 percent debt and 60 percent equity. The company expects to issue more equity in the upcoming year moving its capital structure to 50 percent debt and 50 percent equity for the long term. The company should use the current 40 percent debt/60 equity for its average weighted cost of capital.

True or False?

Question

Business

Hope Morrison

12 October, 08:10

A company's historical target capital structure is 40 percent debt and 60 percent equity. The company expects to issue more equity in the upcoming year moving its capital structure to 50 percent debt and 50 percent equity for the long term. The company should use the current 40 percent debt/60 equity for its average weighted cost of capital.

True or False?

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Answers (1)

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Corbin Daniel · Answer 1

The given statement " A company's historical target capital structure is 40 percent debt and 60 percent equity. The company expects to issue more equity in the upcoming year moving its capital structure to 50 percent debt and 50 percent equity for the long term. The company should use the current 40 percent debt/60 equity for its average weighted cost of capital " is FALSE.

Explanation:

The target value of a corporation applies to the money it aims to raise. This includes the mixture of debt, preferred shares and prevalent equity that is anticipated to optimise the share price of a business.

When an organisation collects new capital, the goal or desired capital structure is retained.

The market price of the business's debt is determined by the amount of the equity and bond exchange prices. The WACC will preferably be measured by means of an unbiased equity framework, which is to preserve the company's capital structure in the long term.