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In: Finance

Book value versus market value components. Compare​ Trout, Inc. with Salmon​ Enterprises, using the balance sheet...

Book value versus market value components.

Compare​ Trout, Inc. with Salmon​ Enterprises, using the balance sheet of Trout and the market data of Salmon for the weights in the weighted average cost of​ capital:  If the​ after-tax cost of debt is 7.3​% for both companies and the cost of equity is 13.59​%, which company has the higher​ WACC? What is the book adjusted WACC of both companies?

Trout, Inc. Current assets: $1,333,333 Current liabilities: $780,712 Long-term assets: $4,666,667 Long-term liabilities: $3,325,337 Total assets: $6,000,000 Owners' equity: $1,893,951

Salmon Enterprises Bonds outstanding: 3,000 selling at $963.87. Common stock outstanding: 260,000 selling at $22.91

Solutions

Expert Solution

Book value adjusted WACC for Trout
WACC = Weight of equity*Cost of equity + Weight of debt*Cost of debt
Calculation of weight of equity and debt
Book value Weight
Equity 1893951 0.362875358 1893951/5219288
Debt 3325337 0.637124642 3325337/5219288
5219288
Calculation of WACC
WACC = (0.1359*0.637)+(0.073*0.363)
WACC 11.31%
Book value adjusted WACC for Trout is 11.31%
Market value adjusted WACC for Salmon
Calculation of weight of equity and debt
Market value
Equity 260000*22.91 5956600 0.673198 5956600/8848210
Debt 3000*963.87 2891610 0.326802 2891610/8848210
8848210
Calculation of WACC
WACC (0.1359*0.673198)+(0.073*0.326802)
WACC 11.53%
Market value adjusted WACC for Salmon enterprises is 11.53%
The WACC for salmon enterprise is higher than for Trout inc.

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