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 $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 $70 million. The current stock price is $23.00 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?
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 $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 $70 million. The current stock price is $23.00 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?
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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Transcribed Image Text: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 $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 $70 million. The current stock price is $23.00 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?
Oa. 1.08%
O b. 0.93%
O
c. 0.70%
O
d. 1.24%
O e. 1.47%
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