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
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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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?
Transcribed Image Text: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?
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