# Regarding the amount of cash raised by issuing bond in calculating the WACC

Hi.

I encountered a rather interesting problem which involves calculating the WACC for a company.

The question goes like this, the company currently has say 10 million euros of debt, traded at 90% of par, yield to maturity = 9%. equity is 10 million euros.

As I understand, the cost of debt in this case is 9% * (1 - T) because this is the effective rate considering that this company only sold the bond at 9 million euros.

The problem I am having is determining the actual amount of debt that will be used to calculate the weight % for the WACC. On one hand, I think I should use 9 million euros divided by 19 million total to get that weight, it would make sense because it is the actual amount of cash that the company has to invest in inventories, machineries etc. On the other hand, is there any reason to use 10 million euros of debt to calculate the weight since it is the par value of the debt that this company is trying to raise and since they sold it only at 9 million, their cost of using debt is 9% (which is actually higher than the coupon rate)?

I tend towards using the real amount of money that this company raised (9 million) but I am a bit confused to be honest.

I appreciate all inputs. Thank you.

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you use the market values of equity & debt

'A flute with no holes, is not a flute. And a donut with no hole, is a danish'

Actually, you should use the Target Weights the company has for equity and debt. In case you don’t have the Target weights you can use the market value weights or the industry median weights

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if the debt is traded at 90% of book value, then you use 9m (market value)

christopheausina wrote:

Actually, you should use the Target Weights the company has for equity and debt. In case you don’t have the Target weights you can use the market value weights or the industry median weights

In my opinion, this is just a method you may use; however, it’s not always true that the company is being able to maintain its Target Weights. Its current weights of capital may derive from its target for some short-term reasons. If this is the case, we should you the market value of Equity and Debt.