ABC Trucking's balance sheet shows a total of noncallable $37 million long-term debt with a coupon rate of 5.60% and a yield to maturity of 7.40%. This debt currently has a market value of $48 million. The balance sheet also shows that the company has 11 million shares of common stock, and the book value of the common equity is $237.35 million. The current stock price is $23.85 per share; stockholders' required return, rs, is 11.50%; and the firm's tax rate is 33.00%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between the WACCs using market value and the book value?
ABC Trucking's balance sheet shows a total of noncallable $37 million long-term debt with a coupon rate of 5.60% and a yield to maturity of 7.40%. This debt currently has a market value of $48 million. The balance sheet also shows that the company has 11 million shares of common stock, and the book value of the common equity is $237.35 million. The current stock price is $23.85 per share; stockholders' required return, rs, is 11.50%; and the firm's tax rate is 33.00%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between the WACCs using market value and the book value?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
ABC Trucking's
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step 1: Formula.
VIEWStep 2: Computation of cost of debt (kd)
VIEWStep 3: Computation of book value weights.
VIEWStep 4: Computation of WACC using book values.
VIEWStep 5: Computation of market value weights.
VIEWStep 6: Computation of WACC using market values.
VIEWStep 7: Computation of difference between the WACCs using market value and the book value.
VIEWSolution
VIEW
Step by step
Solved in 8 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education