Question

Book Co. has 1.2 million shares of common equity with a par​ (book) value of $ 1.40​, retained earnings of $ 28.4 ​million, and its shares have a market value of $ 49.37 per share. It also has debt with a par value of $ 19.7 million that is trading at 103 % 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?

Answer 1

a) $59.244 million

b) $20.291 million

c) Weight of equity = 0.7448 and Weight of debt = 0.2552

Step-by-step explanation:

Data provided:

Number of shares of common equity = 1.2 million

Book value per share = $1.40

Market value = $49.37 per share

debt with a par value = $ 19.7 million

Now,

a. market value of its equity = Market value per share × Number of share

= $49.37 × 1.2

= $59.244 million

b) Market value of its debt = 103% × Value of debt

= 1.03 × 19.7 million

= $20.291 million

c) weights to be used in computing its WACC

Market Values are used in calculating WACC

Weight of equity =
`\frac{\textup{market value of its equity}}{\textup{market value of its equity+Market value of its debt}}`

=
`\frac{\textup{59.244 million}}{\textup{59.244 million+20.291 million}}`

= 0.7448

and,

Weight of debt = 1 - Weight of equity

= 1 - 0.7448

= 0.2552