Question

ABC Trucking's balance sheet shows a total of noncallable $38 million long-term debt with a coupon rate of 5.60% and a yield to maturity of 8.80%. This debt currently has a market value of $55 million. The balance sheet also shows that the company has 12 million shares of common stock, and the book value of the common equity is $216.20 million. The current stock price is $20.10 per share; stockholders' required return, rs, is 14.15%; and the firm's tax rate is 37.00%. 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 the WACCs using market value and the book value?

Work with at least 4 decimals and round your final answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.

Answer 1

Market value WACC is more better than compared to Book value WACC.
Below is the computation of WACC
Market value
Source	Value		Weight	Cost of capital	cost * Weight
Equity	241.2	=20.1*12mil	81.43%	14.15%	11.52%
Debt	55	=20.1*12mil	18.57%	5.54%	1.03%
	296.2				12.55%
Post tax cost of debt = 8.8%*(1-37%)			5.54%
Therefore market value WACC =			12.55%
Book value
Source	Value	Weight	Cost of capital	cost * Weight
Equity	216.2	85.05%	14.15%	12.03%
Debt	38	14.95%	5.54%	0.83%
	254.2			12.86%
Therefore market value WACC =			12.86%
Difference in WACC =			-0.31%