**Understanding Market Value and Weighted Average Cost of Capital (WACC)****Scenario:**Book Co. has 1.0 million shares of common equity with a par (book) value of $1.00, retained earnings of $30.0 million, and its shares have a market value of $50.00 per share. It also has debt with a par value of $20.0 million that is trading at 101% of par.In order to understand the company's financial standing, let's solve the following:**a. What is the market value of its equity?**The market value of the equity is $______________ million. (Round to two decimal places.)**b. What is the market value of its debt?**The market value of the debt is $______________ million. (Round to two decimal places.)**c. What weights should it use in computing its WACC?**The debt weight for the WACC calculation is ______________%. (Round to two decimal places.)The equity weight for the WACC calculation is ______________%. (Round to two decimal places.)---**Detailed Explanation:**1. **Market Value of Equity:** - The number of shares = 1.0 million - Market value per share = $50.00 Therefore, the market value of equity = Number of Shares * Market Value per Share = 1,000,000 * $50.00 = $50,000,000 or $50 million2. **Market Value of Debt:** - Par value of debt = $20.0 million - Debt is trading at 101% of par Therefore, the market value of debt = Par Value of Debt * (Trading Percentage/100) = $20,000,000 * 1.01 = $20,200,000 or $20.20 million3. **Weights for WACC Calculation:** - Equity weight = Market Value of Equity / (Market Value of Equity + Market Value of Debt) - Debt weight = Market Value of Debt / (Market Value of Equity + Market Value of Debt) First, sum the market values of equity and debt: Total = $50,000,000 + $20,200,000 = $70,200,000 - Equity weight = $50,000,000 / $70,200,000

Market value of the Equity is known as the current trading value of Equity. It provides information…

Book Co. has 1.0 million shares of common equity with a par (book) value of $1.00, retained earnings of $30.0 million, and its shares have a market value of $50.00 per share. It also has debt with a par value of $20.0 million that is trading at 101% of par. a. What is the market value of its equity? b. What is the market value of its debt? c. What weights should it use in computing its WACC? a. What is the market value of its equity? The market value of the equity is $ million. (Round to two decimal places.) b. What is the market value of its debt? The market value of the debt is $ million. (Round to two decimal places.) c. What weights should it use in computing its WACC? The debt weight for the WACC calculation is %. (Round to two decimal places.) The equity weight for the WACC calculation is places.) %. (Round to two decimal

Book Co. has 1.0 million shares of common equity with a par (book) value of $1.00, retained earnings of $30.0 million, and its shares have a market value of $50.00 per share. It also has debt with a par value of $20.0 million that is trading at 101% of par. a. What is the market value of its equity? b. What is the market value of its debt? c. What weights should it use in computing its WACC? a. What is the market value of its equity? The market value of the equity is $ million. (Round to two decimal places.) b. What is the market value of its debt? The market value of the debt is $ million. (Round to two decimal places.) c. What weights should it use in computing its WACC? The debt weight for the WACC calculation is %. (Round to two decimal places.) The equity weight for the WACC calculation is places.) %. (Round to two decimal

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter15: Distributions To Shareholders: Dividends And Repurchases

Section: Chapter Questions

Problem 3MC: Assume that IWT has completed its IPO and has a $112.5 million capital budget planned for the coming...

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