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the cost of equity is at 14%. Calculate the WACC using both the book value and the market value approaches with the following information. Which do think is better? Why? you

the cost of equity is at 14%. Calculate the WACC using both the book value and the market value approaches with the following information. Which do think is better? Why? you

Essentials Of Investments
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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#12 Book value versus market value components 

**Book Value versus Market Value Components** The CFO of DMI is trying to determine the company’s WACC (Weighted Average Cost of Capital). Brad, a promising MBA, suggests that the company should use book value to assign the WACC components’ percentages. Angela, a long-time employee and experienced financial analyst, argues that the company should use market value to assign the components’ percentages. The after-tax cost of debt is at 7%, the cost of preferred stock is at 11%, and the cost of equity is at 14%. Calculate the WACC using both the book value and market value approaches with the following information. Which do you think is better? Why? --- *Note: There are no graphs or diagrams in the text.*
Transcribed Image Text:**Book Value versus Market Value Components** The CFO of DMI is trying to determine the company’s WACC (Weighted Average Cost of Capital). Brad, a promising MBA, suggests that the company should use book value to assign the WACC components’ percentages. Angela, a long-time employee and experienced financial analyst, argues that the company should use market value to assign the components’ percentages. The after-tax cost of debt is at 7%, the cost of preferred stock is at 11%, and the cost of equity is at 14%. Calculate the WACC using both the book value and market value approaches with the following information. Which do you think is better? Why? --- *Note: There are no graphs or diagrams in the text.*
**The Cost of Capital** ### DMI Balance Sheet ($ in thousands) #### Assets - **Current assets:** $32,000 - **Long-term assets:** $66,000 **Total assets:** $98,000 #### Liabilities and Owners' Equity - **Current liabilities:** $0 - **Long-term liabilities:** - Bonds payable: $54,000 - **Owners’ Equity:** - Preferred stock: $12,000 - Common stock: $32,000 **Total liabilities and owners' equity:** $98,000 --- ### Market Information | | **Debt** | **Preferred Stock** | **Common Stock** | |------------------|----------|---------------------|------------------| | **Outstanding** | 54,000 | 120,000 | 1,280,000 | | **Market price** | $1,085 | $95.40 | $32.16 | This table presents the financial data of DMI. The balance sheet shows asset distribution and financing structure via liabilities and equity. Market information includes total units outstanding and their current market price across different financial instruments.
Transcribed Image Text:**The Cost of Capital** ### DMI Balance Sheet ($ in thousands) #### Assets - **Current assets:** $32,000 - **Long-term assets:** $66,000 **Total assets:** $98,000 #### Liabilities and Owners' Equity - **Current liabilities:** $0 - **Long-term liabilities:** - Bonds payable: $54,000 - **Owners’ Equity:** - Preferred stock: $12,000 - Common stock: $32,000 **Total liabilities and owners' equity:** $98,000 --- ### Market Information | | **Debt** | **Preferred Stock** | **Common Stock** | |------------------|----------|---------------------|------------------| | **Outstanding** | 54,000 | 120,000 | 1,280,000 | | **Market price** | $1,085 | $95.40 | $32.16 | This table presents the financial data of DMI. The balance sheet shows asset distribution and financing structure via liabilities and equity. Market information includes total units outstanding and their current market price across different financial instruments.
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