Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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**Understanding Market Value and Weighted Average Cost of Capital (WACC)**

**Scenario:**

Book Co. has 1.0 million shares of common equity with a par (book) value of $1.00, retained earnings of $30.0 million, and its shares have a market value of $50.00 per share. It also has debt with a par value of $20.0 million that is trading at 101% of par.

In order to understand the company's financial standing, let's solve the following:

**a. What is the market value of its equity?**

The market value of the equity is $______________ million. (Round to two decimal places.)

**b. What is the market value of its debt?**

The market value of the debt is $______________ million. (Round to two decimal places.)

**c. What weights should it use in computing its WACC?**

The debt weight for the WACC calculation is ______________%. (Round to two decimal places.)

The equity weight for the WACC calculation is ______________%. (Round to two decimal places.)

---

**Detailed Explanation:**

1. **Market Value of Equity:**
   - The number of shares = 1.0 million
   - Market value per share = $50.00
   
   Therefore, the market value of equity = Number of Shares * Market Value per Share
   = 1,000,000 * $50.00   
   = $50,000,000 or $50 million

2. **Market Value of Debt:**
   - Par value of debt = $20.0 million
   - Debt is trading at 101% of par
   
   Therefore, the market value of debt = Par Value of Debt * (Trading Percentage/100)
   = $20,000,000 * 1.01   
   = $20,200,000 or $20.20 million

3. **Weights for WACC Calculation:**
   - Equity weight = Market Value of Equity / (Market Value of Equity + Market Value of Debt)
   - Debt weight = Market Value of Debt / (Market Value of Equity + Market Value of Debt)
   
   First, sum the market values of equity and debt:
   Total = $50,000,000 + $20,200,000 = $70,200,000
   
   - Equity weight = $50,000,000 / $70,200,000
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Transcribed Image Text:**Understanding Market Value and Weighted Average Cost of Capital (WACC)** **Scenario:** Book Co. has 1.0 million shares of common equity with a par (book) value of $1.00, retained earnings of $30.0 million, and its shares have a market value of $50.00 per share. It also has debt with a par value of $20.0 million that is trading at 101% of par. In order to understand the company's financial standing, let's solve the following: **a. What is the market value of its equity?** The market value of the equity is $______________ million. (Round to two decimal places.) **b. What is the market value of its debt?** The market value of the debt is $______________ million. (Round to two decimal places.) **c. What weights should it use in computing its WACC?** The debt weight for the WACC calculation is ______________%. (Round to two decimal places.) The equity weight for the WACC calculation is ______________%. (Round to two decimal places.) --- **Detailed Explanation:** 1. **Market Value of Equity:** - The number of shares = 1.0 million - Market value per share = $50.00 Therefore, the market value of equity = Number of Shares * Market Value per Share = 1,000,000 * $50.00 = $50,000,000 or $50 million 2. **Market Value of Debt:** - Par value of debt = $20.0 million - Debt is trading at 101% of par Therefore, the market value of debt = Par Value of Debt * (Trading Percentage/100) = $20,000,000 * 1.01 = $20,200,000 or $20.20 million 3. **Weights for WACC Calculation:** - Equity weight = Market Value of Equity / (Market Value of Equity + Market Value of Debt) - Debt weight = Market Value of Debt / (Market Value of Equity + Market Value of Debt) First, sum the market values of equity and debt: Total = $50,000,000 + $20,200,000 = $70,200,000 - Equity weight = $50,000,000 / $70,200,000
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