Question

1a You now need to calculate the cost of debt for Tesla. Consider the following four bonds issued by Tesla: What is the weighted average cost of debt for Tesla using the book value weights and the market value weights? Does it make a difference in this case if you use book value weights or market value weights? 04/20/2020

Why is my book value weights and market value weights percentage the same amount but the total is different? Did I input the formula wrong? Please help

	Book Value	Book Value Weight	Yield to Maturity	Weighted Average Cost
1	1,200,000	32.88%	-70.183	-23.07386301
2	850,000	23.29%	-39.192	-9.12690411
3	1,600,000	43.84%	-20.192	-8.851287671
Total	3,650,000
Weighted Average Cost of Debt (Book Value)
	Market Value	Market Value Weight	Yield to Maturity	Weighted Average Cost
1	1,380,000	32.88%	-70.183
2	977,500	23.29%	-39.192
3	1,840,000	43.84%	-20.192
Total	4,197,500
Weighted Average Cost of Debt (Market Value)

Am I doing the formula wrong because I'm getting the same market and book value?

Answer 1

The methodology for calculating book-value weights and market-value weights remains the same. That is, you use the total value (book or market) as the denominator and the book or market value of a particular type of bond as the numerator. The book value and market value weights and WACC under each method are calculated as below:

Book Value:

	Amount in Dollars	Book Value Weight (A)	Yield to Maturity (B)	A*B
Book Value of Bond 1	1,200,000	32.88% [1,200,000/3,650,000]	-70.18%	-23.07%
Book Value of Bond 2	850,000	23.29% [850,000/3,650,000]	-39.19%	-9.13%
Book Value of Bond 3	1,600,000	43.84% [1,600,000/3,650,000]	-20.19%	-8.85%
Total	$3,650,000
Weighted Average Cost of Debt (Book Value)				-41.05%

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Market Value:

	Amount in Dollars	Market Value Weight (C)	Yield to Maturity (D)	C*D
Market Value of Bond 1	1,380,000	32.88% [1,380,000/4,197,500]	-70.18%	-23.07%
Market Value of Bond 2	977,500	23.29% [977,500/4,197,500]	-39.19%	-9.13%
Market Value of Bond 3	1,840,000	43.84% [1,840,000/4,197,500]	-20.19%	-8.85%
Total	$4,197,500
Weighted Average Cost of Debt (Market Value)				-41.05%

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Conclusion:

Based on the above calculations, it can be concluded that the formula/methodology applied by you to calculate the weights (both book and market) is correct. In the given case, since, the book value and market value weights are same, the weighted average cost of debt would also be the same and therefore, it won't make any difference as to which basis (book or market) is used for calculation of cost of debt. However, this is a very rare scenario in the practical world. Therefore, it is advisable to calculate both the weights.

The possible reason for the same percentage weights is that the proportion of a particular type of bond is constant in the total debt structure of the company. The total is different because, the market value indicates the current value of debt while the book value indicates carrying value of bonds as reported in the financial statements.