Book Value adjusted for WACC questionSolutionFor Trout Inc W

Book Value adjusted for WACC question.

For Trout, Inc.

Wd = Value of Debt / Value of Assets

= ($1,324,327 + $7,315,148) / $12,000,000 = $8,639,475 / $12,000,000 = 0.7200, or 72%

We = 1 - Wd = 1 - 72% = 28%

WACC = Wd x After-Tax Kd + We x Ke

= (0.72 x 11.3%) + (0.28 x 17.76%)

= 8.1355% + 4.9736% = 13.1091, or 13.11%

For Salmon Enterprises,

Value of Debt = 3,000 x $1,038.79 = $3,116,370

Value of Equity = 260,000 x $35.48 = $9,224,800

Total Value = Value of Debt + Value of Equity = $3,116,370 + $9,224,800 = $12,341,170

Wd = Value of Debt / Total Value = $3,116,370/$12,341,170 = 0.252518197

We = 1 - Wd = 1 - 0.252518197 = 0.747481803

WACC = Wd x After-Tax Kd + We x Ke

= (0.2525 x 11.3%) + (0.7475 x 17.76%)

= 2.8535% + 13.2753% = 16.1287, or 16.13%

So, Salmon Enterprises has a higher WACC.