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Book Co. has 1.3 million shares of common equity with a par (book) value of $1.40,...

Book Co. has 1.3 million shares of common equity with a par (book) value of $1.40, retained earnings of $28.9 million, and its shares have a market value of $50.19 per share. It also has debt with a par value of $21.7 million that is trading at 105% of par.

a. What is the market value of its equity?

b. What is the market value of its debt?

c. What weights should it use in computing its WACC?

a. What is the market value of its equity?

The market value of the equity is________ $ million. (Round to two decimal places.)

b. What is the market value of its debt?

The market value of the debt is _______$ million. (Round to two decimal places.)

c. What weights should it use in computing its WACC?

The debt weight for the WACC calculation is_________ %. (Round to two decimal places.)

The equity weight for the WACC calculation is _______%. (Round to two decimal places.)

Solutions

Expert Solution

The weights in the calculation of WACC should be based on market values, not book value.

Let us start by finding the market value of equity:

The market value of equity can be calculated as = Market price per share*number of shares outstanding

1.3 million shares of common equity * market value of $50.19 per share = 65.247 million dollars.

a) the market value of its equity is 65.247 million dollars.

b) the market value of its debt can be calculated as:

Given in the question: debt with a par value of $21.7 million that is trading at 105% of par.

therefore, Market value of debt is $21.7 million * 105% = $22.785 million.

c) What weights should it use in computing its WACC?

To calculate the weight of equity and debt, we first need to find the total capital structure.

Total Capital = value of equity+value of debt

= $65.247 million + $22.785 million = $88.032 million

The equity weight for the WACC calculation is the market value of equity divided by the total capital of the company.

The debt weight for the WACC calculation is the market value of debt divided by the total capital of the company.

Therefore,

Weight of equity = 65.247/88.032 = 0.74117 = 74% (Rounding off)

Weight of debt = 22.785/88.032 = 0.258826 = 26% (Rounding off).

jeff jeffy answered 1 year ago

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