Homework SourseABC Truckings balance sheet shows a total of noncallable 35
ABC Trucking\'s balance sheet shows a total of noncallable $35 million long-term debt with a coupon rate of 6.70% and a yield to maturity of 7.90%. This debt currently has a market value of $52 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 $175.00 million. The current stock price is $20.00 per share; stockholders\' required return, rs, is 13.60%; 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.
| –0.34% |
Solution
Solution:
Market value of Debt = $52 million
Market value of equity = $20 * 10 million shares = $200 million
Total market value = $200 + $52 = $252 million
Weight of Market value of debt = 52/252 *100 = 20.63%
Weight of Market value of Equity= 200/252 *100 = 79.37%
Book value of Debt = $35 million
Book value of Equity = $175 million
Total Book value = $35 + $175 = $210 million
Weight of Book value of debt = 35/210 *100 = 16.67%
Weight of Book value of Equity= 175/210 *100 = 83.33%
WACC = Wd * Rd * (1 - t) + We * Re
Bond yield (Rd) = 7.9%
tax rate = 36 %
Cost of equity (Re) = 13.6%
WACC at Market value = 0.2063 * 7.9 * (1 - 0.36) + 0.7937 * 13.6 = 11.8374%
WACC at Book value = 0.1667 * 7.9 * (1 - 0.36) + 0.8333 * 13.6 = 12.1757%
Difference between the WACCs using market value and the book value = 11.8374 - 12.1757 = - 0.3383 = - 0.34%
First Option is correct
