Question

11.6

Book value versus market value components. The CFO of DMI is trying to determine the company'e WACC. Brad, a promising MBA, says that he company should use book value to assign the WACC components' percentages. Angela, a long-time employee and experienced financial Analyst, says that the company should use market value to assign the components' percentages. The after-tax cost of cebt is at 10.3% the cost of preferred stock is at 1529%, and the cost of equity is at 19.47%. Calculate the WACC using both the book value and the market value approaches with the information in the popup window. Which do you think is beller? What is the book value adjusted WACC for DMI? Round to two decimal places.) i Data Table $0 $57.100 CNCK on the icon in order to copy is content into a apresoshest. DMI lance Sheet($in thousands) Current assets $31,347 Current liabilities Long-term assets $64.653 Long-term labilities Bands payahin Owners' equity Preferred stock Common stock Total liabilities and Total assets $93,000 owners' equity $14.000 $25.000 $98.000 Click on the icon in order to copy ils criter into a spreadsheul Market Information Debt Outstanding 57,000 Market Price $1,010.12 Preferred Stock 140,000 $103.85 Common Stock 1,000,000 $33.54

Answer 1

с D E F G H 3 Cost A B 2 Calculation of WACC with book values Book values 4 Debt $ 5 Preferred Stocks $ 6 Common Stocks $ 7 $ 8 Weights 57,000.00 59.375% 14,000.00 14.583% 25,000.00 26.042% 96,000.00 10.30% 15.29% 19.47% Cost * weights 6.1156% 2.2298% 5.0703% 13.42% 9 10 11 Calculation of WACC with Market values 12 The Number of Securities Outstanding Selling price Total market value Weights Cost Cost *weights 13 Debt 57,000 $ 1,010.12 $ 57,576,840.00 54.495% 10.30% 5.6130% 14 Preferred Stocks 140,000 $ 103.85 $ 14,539,000.00 13.761% 15.29% 2.1040% 15 Common Stocks 1,000,000 $ 33.54 $ 33,540,000.00 31.745% 19.47% 6.1807% 16 $ 105,655,840.00 13.90% 17 18 WACC with market value weights always shows the true value of the cost of capital wheras WACC with book value weights might not do the same. 19 Hence, WACC with market values weights is better to know the true cost. 20

B с D E F A 2 Calculation of WACC with book values 3 Book values 4 Debt 57000 5 Preferred Stocks 14000 6 Common Stocks 25000 7 =SUM(B4:36) 8 Weights =B4/B7 =B5/B7 =B6/B7 Cost 0.103 0.1529 0.1947 Cost "weights =D4*C4 =D5*C5 =D6*C6 =SUM(E4:E6) 9 Cost 10 11 Calculation of WACC with Market values 12 The Number of Securities Outstanding 13 Debt 57000 14 Preferred Stocks 140000 15 Common Stocks 1000000 16 Selling price 1010.12 0.103 Total market value |=B13*C13 =B14*C14 I=B15*C15 =SUM(D13:015) Weights =D13/D16 =D14/D16 =D15/D16 103.85 33.54 0.1529 Cost "weights =F13*E13 =F14%E14 =F15*E15 =SUM(G13:615) 0.1947 17 18 WACC with market value weights always shows the true value of the cost of capital wheras WACC with book value weights might not do the same. 19 Hence, WACC with market values weights is better to know the true cost.
Please upvote if the answer is helpful.In case of doubt,do comment.Thanks.