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In: Finance

In 2018, Caterpillar Inc. had about 654 million shares outstanding. Their book value was $29.0 per...

In 2018, Caterpillar Inc. had about 654 million shares outstanding. Their book value was $29.0 per share, and the market price was $157.80 per share. The company’s balance sheet shows that the company had $18.80 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

Ans:- Book debt to value ratio is given by Value of debt / Book Value of the firm

Value debt is $18.80 billion i.e $18.80 * 1000 = $18,800 millions

Book Value of the firm is given by Value of debt + Book value of equity.

= $18.80 * 1000 + 654 * $29 = $37,766 million.

Book debt to value = $18,800 / $37,766 = 0.50.

Note:- Debt value is multiplied by 1000 to convert billions into millions.

(b) Market Debt to value is given by Debt Value / Market Value of the firm

Market Value of the firm is given by Debt value + Market Value of equity.

=$18.80 * 1000 + 654 * $157.80 = $122,001.20 millions

Market Debt to value =18,800 / $122,001.20 = 0.15.

Note:- Debt value is multiplied by 1000 to convert billions into millions.

(c) Market Value should be used to measure the company's cost of capital because it is considered more accurate.

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jeff jeffy answered 1 year ago

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