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. a. What is the market value of its equity? b. What is the market value of its debt? c. What weights should it use in computing its WACC? 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 places.) %. (Round to two decimal
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. a. What is the market value of its equity? b. What is the market value of its debt? c. What weights should it use in computing its WACC? 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 places.) %. (Round to two decimal
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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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