ABC Trucking\'s balance sheet shows a total of non-callable $30 million long-ter
ID: 2801045 • Letter: A
Question
ABC Trucking's balance sheet shows a total of non-callable $30 million long-term debt with a coupon rate of 5.90% and a yield to maturity of 7.10%. This debt currently has a market value of $33 million. The balance sheet also shows that the company has 20 million shares of common stock, and the book value of the common equity is $200.00 million. The current stock price is $12.60 per share; stockholders' required return, rs, is 12.50%; and the firm's tax rate is 40.00%. 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
Explanation / Answer
WACC USING BOOK VALUE WEIGHTS
SOURCE
VALUE
WEIGHT
COST OF SOURCE
WEIGHT* COST OF SOURCE
DEBT
30000000
0.130435
4.26
0.555652
EQUITY
200000000
0.869565
12.5
10.86957
TOTAL
230000000
WEIGHTED AVERAGE COST OF CAPITAL
11.42522
WACC USING MARKET VALUE WEIGHTS
SOURCE
VALUE
WEIGHT
COST OF SOURCE
WEIGHT* COST OF SOURCE
DEBT
33000000
0.115789
4.26
0.493263
EQUITY
252000000
0.884211
12.5
11.05263
TOTAL
285000000
WEIGHTED AVERAGE COST OF CAPITAL
11.54589
DIFFERENCE IN WACC USING MARKET VALUE WEIGHTS AND BOOK VALUE WEIGHTS
11.5458-11.4252
0.1206
AFTER COST OF DEBT
YTM*(1-TAX RATE)
7.1*(1-.4)
4.26
WACC USING BOOK VALUE WEIGHTS
SOURCE
VALUE
WEIGHT
COST OF SOURCE
WEIGHT* COST OF SOURCE
DEBT
30000000
0.130435
4.26
0.555652
EQUITY
200000000
0.869565
12.5
10.86957
TOTAL
230000000
WEIGHTED AVERAGE COST OF CAPITAL
11.42522
WACC USING MARKET VALUE WEIGHTS
SOURCE
VALUE
WEIGHT
COST OF SOURCE
WEIGHT* COST OF SOURCE
DEBT
33000000
0.115789
4.26
0.493263
EQUITY
252000000
0.884211
12.5
11.05263
TOTAL
285000000
WEIGHTED AVERAGE COST OF CAPITAL
11.54589
DIFFERENCE IN WACC USING MARKET VALUE WEIGHTS AND BOOK VALUE WEIGHTS
11.5458-11.4252
0.1206
AFTER COST OF DEBT
YTM*(1-TAX RATE)
7.1*(1-.4)
4.26