Question
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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