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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

Solutions

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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