Book value versus market value components. Compare Trout, Inc. with Salmon Enter
ID: 2802798 • Letter: B
Question
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 8.5% for both companies and the cost of equity is 13.19%, which company has the higher WACC? What is the book value adjusted WACC for Trout, Inc.? []% (Round to two decimal places.) What is the market value adjusted WACC for Salmon Enterprises? 1% (Round to two decimal places.) Which company has the higher WACC? (Select the best response.) O A. Salmon Enterprises has a higher WACC at 11.96% than Trout, Inc. with a WACC of 9.83%. O B. Trout, Inc. has a higher WACC at 11.96% than Salmon Enterprises with a WACC of 9.83%. Click to select your answer(s).Explanation / Answer
Answer)
WACC for trout =Weight of debt * cost of debt*(1-tax) + weight of equity *cost of equity
Total equity =2734852
Total debt = 1381648 + 6883500 = 8265148
Total value = 2734852 + 8265148 = 11000000
Weight of debt = 8265148/11000000 = 75.14%
Weight of equity = 2734852/11000000 = 24.86%
WACC = 75.14%*8.5% +24.86%*13.19% = 9.83%
Answer b) WACC Salmon
Value of debt = 975.72 x 3000 = 2927160
Value of equity = 31.62 x 260000 = 8221200
Total value = 2927160+8221200 = 11148360
Weight of debt = 2927160/11148360 = 26.256%
Weight of equity = 8221200/11148360 = 73.744%
WACC = 26.256%*8.50% + 73.744%*13.19% = 11.96%
Option A) Salmon Enterprises has a higher WACC at 11.96% as compared to trout Inc.