ABC Trucking\'s balance sheet shows a total of noncallable $38 million long-term
ID: 2763204 • Letter: A
Question
ABC Trucking's balance sheet shows a total of noncallable $38 million long-term debt with a coupon rate of 7.40% and a yield to maturity of 8.90%. This debt currently has a market value of $53 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity is $222.00 million. The current stock price is $24.70 per share; stockholders' required return, rs, is 13.10%; and the firm's tax rate is 27.00%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between the WACCs using market value and the book value?
A) –0.21%
B)–0.16%
C) –0.22%
D) –0.20%
E) –0.15%
Please show work
Explanation / Answer
ABC Trucking All Amounts in $ million Working of WACC based on Book Value Particulars Book Cost After Weighted Value Tax Value Cost Debt 38 7.40% 5.40% 2.053 Common Stock 222 13.10% 13.10% 29.08 260 31.13 Adjusted WACC 11.97% Working of WACC based on Market Value Particulars Market Cost After Weighted Value Tax Value Cost Debt 53 7.40% 5.40% 2.863 Common Stock 247 13.10% 13.10% 32.36 300 35.22 Adjusted WACC 11.74% Thus, the difference between WACC using book value and market value is -0.22%.