Sans Souci Trucking's balance sheet shows a total of noncallable $40 million long-term debt with a coupon rate of 6.50% and a yield to maturity of 7.00%. This debt currently has a market value of $38.595 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $60 million. The current stock price is $30.00 per share; stockholders' required return, rs, is 12.00%; and the firm's tax rate is 40%. 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 these two WACCs?

Sans Souci Trucking's balance sheet shows a total of noncallable $40 million long-term debt with a coupon rate of 6.50% and a yield to maturity of 7.00%. This debt currently has a market value of $38.595 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $60 million. The current stock price is $30.00 per share; stockholders' required return, rs, is 12.00%; and the firm's tax rate is 40%. 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 these two WACCs?

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

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Sapp Trucking's balance sheet shows a total of noncallable $35 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $45 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $55 million. The current stock price is $29.00 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 25%. 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 these two WACCs? a. 1.78% b. 2.04% c. 2.42% d. 1.15% e. 1.53%
Omega Corporation has 11.2 million shares outstanding, no debt, and an expected rate of return to shareholders of 12.00%. Now, the firm issues $190 million of bonds rated AAA yielding 9%. The firm invests the funds raised in new assets of identical risk to the firm’s initial assets. After the debt issue, the firm’s shares trade at $53 per share. Assume the firm pays taxes at a marginal rate of 35% and continuously rebalances leverage. Calculate Omega’s cost of equity capital (rE) and after-tax WACC after the debt issue? a. rE = 21.01%; WACC = 24.25% b. rE = 11.82%; WACC = 8.51% c. rE = 12.00%; WACC = 12.00% d. rE = 12.96%; WACC = 11.24%
Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.26 %. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $55 million. The current stock price is $20 per share; stockholders' required return, rs, is 21.83 % ; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the idiot president thinks book weights are more appropriate. What is the difference between these two WACCS?
The total book value of WTC's equity is $13 million, and book value per share is $20. The stock has a market-to-book ratio of 1.5, and the cost of equity is 9%. The firms bonds have a face value of $9 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 7% andthe firm's tax rate is 21%. What is the company's WACC? (Don't round intermediate calculations, enter final answers as a percent rounded to 2 decimal places.)
Granite Works maintains a debt-equity ratio of .65 and has a tax rate of 32%. The pretax cost of debt is 9.8%. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share. The current market risk premium is 8.5% and the current risk-free rate is 3.6%. This year, the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2% each year. Using an average expected cost of equity, what is the WACC?
Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $24.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 25%. 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 these two WACCs? a. 1.92% b. 2.28% c. 1.08% d. 1.68% e. 1.44%
Wayco Industrial Supply has a pretax cost of debt of 7.6%, a cost of equity of 16.8%, and a cost of preferred stock of 9.1%. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 34%. What is the firm's weighted average cost of capital?
ABC Trucking's balance sheet shows a total of noncallable $30 million long-term debt with a coupon rate of 6.80% and a yield to maturity of 8.10%. This debt currently has a market value of $48 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity is $213.00 million. The current stock price is $23.80 per share; stockholders' required return, rs, is 15.05%; and the firm's tax rate is 36.00%. 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?Work with at least 4 decimals and round your final answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. Group of answer choices –0.46% –0.49% –0.44% –0.34% –0.36%
Suppose Westerfield Co. has the following financial information: Debt: 900, 000 bonds outstanding with a face value of $1,000. The bonds currently trade at 85% of par and have 12 years to maturity. The coupon rate equals 7%, and the bonds make semiannual interest payments. Preferred stock: 600,000 shares of preferred stock outstanding; currently trading for $108 per share, paying a dividend of $9 annually. Common stock: 25,000,000 shares of common stock outstanding; currently trading for $185 per share. Beta equals 1.22. Market and firm information: The expected return on the market is 9%, the risk - free rate is 5%, and the tax rate is 21 %. Calculate the weight of debt in the capital structure. (Enter percentages as decimals and round to 4 decimals)
The total book value of WTC's equity is $13 million, and book value per share is $26. The stock has a market-to-book ratio of 1.5, and the cost of equity is 15%. The firm's bonds have a face value of $9 million and sell at a price of 110% of face value. The yield to maturity on the bonds is 10%, and the firm's tax rate is 21%. What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 8.81 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent? a. 14.52 percent b. 13.92 percent c. 13.44 percent d. 14.37 percent e. 14.19 percent
MV Corporation has debt with market value of $97 million, common equity with a book value of $105 million, and preferred stock worth $23 million outstanding. Its common equity trades at $46 per share, and the firm has 6.1 million shares outstanding. What weights should MV Corporation use in its WACC? The debt weight for the WACC calculation is %. (Round to two decimal places.)

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