In 2018, Caterpillar Inc. had about 665 million shares outstanding. Their book value was $37.0 per...

In 2018, Caterpillar Inc. had about 665 million shares outstanding. Their book value was $37.0 per share, and the market price was $152.80 per share. The company’s balance sheet shows that the company had $28.50 billion of long-term debt, which was currently selling near par value.

a. What was Caterpillar’s book debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)

b. What was its market debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)

c. Which measure should you use to calculate the company’s cost of capital?

Expert Solution

Answer to Part a:
Book Value of Debt = $28.50 billion
Book Value of Equity = 0.665 billion * $37.0
Book Value of Equity = $24.605 billion

Book debt to value ratio = Book Value of Debt / (Book Value of Debt + Book Value of Equity)
Book debt to value ratio = $28.50 billion / ($28.50 billion + $24.605 billion)
Book debt to value ratio = $28.50 billion / $53.105 billion
Book debt to value ratio = 0.54

Answer to Part b:
Market Value of Debt = $28.50 billion
Market Value of Equity = 0.665 billion * $152.80
Market Value of Equity = $101.612 billion

Market debt to value ratio = Market Value of Debt / (Market Value of Debt + Market Value of Equity)
Market debt to value ratio = $28.50 billion / ($28.50 billion + $101.612 billion)
Market debt to value ratio = $28.50 billion / $130.112 billion
Market debt to value ratio = 0.22

Answer to Part c:
Market Value is the proper measure as it reflects current value rather than historical cost.

jeff jeffy answered 1 year ago

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