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Question

The President and CFO of Spellman Transportation are having a

disagreement about
whether to use market value or book value
weights in calculating the WACC. Spellman's
balance sheet shows a
total of noncallable $45 million long-term debt with a coupon rate
of 7.00% and a yield to maturity of 6.00%. This debt currently has
a market value of $50
million. The company has 10 million shares of
common stock, and the book value of the
common equity (common stock
plus retained earnings) is $65 million. The current stock
price is
$22.50 per share; stockholders' required return, rs, is 14.00%; and
the firm's tax
rate is 40%. 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 these
two WACCs?
a) 1.55% b) 1.72% c) 1.91% d) 2.13% e) 2.36%

Answers

100% (16 ratings)

BV
value

Capital weight Cost Product

rates

Stock $
price 22.50

Share
outstanding $ 10 million Debt $ 45.0 40.91% 3.60% 1.47%

YTM 6% Equity $ 65.0 59.09% 14.00% 8.27%

rs 14% Total $ 110.0 100% WACC 9.75%

tax rate 40%

BV of $ 45
debt

MKT value

Capital weight Cost Product

rates

1/4
 Debt $ 50.0 18.18% 3.60% 0.65%

Equity $ 81.82% 14.00% 11.45%

225.0

Total $ 100% WACC 12.11%

275.0

Difference of BV
and MV 2.36%

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More Answers

e) 2.36%-answer

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 Q:

The president and CFO of Spellman Transportation are having adisagreement about
whether to use market value or book valueweights in calculating the WACC.
Spellman's balance sheet shows atotal of noncallable $45 million long-term debt
with a coupon rateof 7.00% and a yield to maturity of 6.00%. This debt currently
hasa market value of $50 million. The company has 10 million shares ofcommon
stock, and the book value of the common equity (common sto...

A:

See answer

100% (6 ratings)

Questions viewed by other students

Q:

The President and CFO of Spellman Transportation are having adisagreement about
whether to use market value or book valueweights in calculating the WACC.
Spellman's balance sheet shows atotal of noncallable $45 million long-term debt
with a coupon rateof 7.00% and a yield to maturity of 6.00%. This debt currently
hasa market value of $50 million. The company has 10 million shares ofcommon
stock, and the book value of the common equity (common sto...

A:

See answer

100% (16 ratings)

Q:

The president and CFO of Spellman Transportation are having adisagreement about
whether to use market value or book valueweights in calculating the WACC.
Spellman's balance sheet shows atotal of noncallable $45 million long-term debt
with a coupon rateof 7.00% and a yield to maturity of 6.00%. This debt currently
hasa market value of $50 million. The company has 10 million shares ofcommon
stock, and the book value of the common equity (common sto...

A:

See answer

100% (11 ratings)

My Textbook Solutions

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 ePack: Quantitative Methods for Business (with Printed
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