Book Co. has 1.1 million shares of common equity with a par (book) value of $...

Book Co. has 1.1 million shares of common equity with a par (book) value of $ 1.10, retained earnings of $ 31.4 million, and its shares have a market value of $ 51.31 per share. It also has debt with a par value of $ 21.9 million that is trading at 102 % 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 $ nothing million

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Expert Solution

Part a)

The market value of equity is calculated as below:

Market Value of Equity = Number of Shares of Common Equity*Market Value per Share

Here, Number of Shares of Common Equity = 1.1 million and Market Value per Share = $51.31 per share

Using these values in the above formula, we get,

Market Value of Equity = 1.1*51.31 = $56.441 million or $56.44 million (if rounded to two decimal places)

_____

Part b)

The market value of debt is determined as follows:

Market Value of Debt = Par Value of Debt*Current Trading Percentage

Here, Par Value of Debt = $21.9 million and Current Trading Percentage = 102%

Using these values in the above formula, we get,

Market Value of Debt = 21.9*102% = $22.338 million or $22.34 million (if rounded to two decimal places)

_____

Part c)

The weights that should be used in calculating WACC are calculated as below:

Weight of Equity = Market Value of Equity/(Market Value of Equity+Market Value of Debt) = 56.441/(56.441+22.338) = 71.64%

Weight of Debt = Market Value of Debt/(Market Value of Equity+Market Value of Debt) = 22.338/(56.441+22.338) = 28.36%

jeff jeffy answered 1 year ago

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Book Co. has 1.1 million shares of common equity with a par​ (book) value of $...

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