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 7.5% for both companies and the cost of equity is 12.24%, which company has the higher WACC? What is the book value adjusted WACC for Trout, Inc.? % (Round to two decimal places.) Х Data Table Click on the Icon in order to copy its content into a spreadsheet. Trout, Inc. Current assets: $1,555,556 Current liabilities: Long-term assets: $5,444,444 Long-term liabilities: Total assets: $7,000,000 Owners' equity: $1,023,752 $3,917,593 $2,058,655 Salmon Enterprises Bonds outstanding: 3,000 selling at $1,017.56 Common stock outstanding: 260,000 selling at $30.41

Answer 1

Trout

Book value of Equity = $2,058,655

Book Value of Debt = $3,917,593

Weights = Book Value/ Total Capital

Cost of Equity = 12.24%

After tax cost of debt = 7.5%

	Book Value	Weights	Cost	Weights*Cost
Equity	2,058,655	34.45%	0.1224	4.22%
Debt	3,917,593	65.55%	0.0750	4.92%
Total Capital	5,976,248	WACC	9.13%

Salmon Enterprises

Market value of Equity = 260,000*$30.41 =$7,906,600

Market Value of Debt = 3000*$1017.56 = $3,052,680

Weights = Market Value/ Total Capital

Cost of Equity = 12.24%

After tax cost of debt = 7.5%

	Market Value	Weights	Cost	Weights*Cost
Equity	7,906,600	72.15%	0.1224	8.83%
Debt	3,052,680	27.85%	0.0750	2.09%
Total Capital	10,959,280	WACC	10.92%

Salmon Enterprises has a higher WACC.