Question

Book Co. has 1.2 million shares of oommon equity with a par (book) value of $1.25, rotained earnings of $29.4 million, and its shares have a market value of $48.87 per share. it also hos debt with a par value of $20.9 milion that is trading at 105% of par.

a. What is the market vasue of its equity?
b. What is the market value of its debi?
c. What weights should i use in computing its WACC?

Answer 1

The market value of Book Co.'s equity is $58.644 million, the market value of its debt is $21.945 million, and these values are used to calculate the weights for the WACC.

Step-by-step explanation:

To calculate the market value of Book Co.'s equity, we multiply the number of shares by the market price per share. Therefore, the market value of equity is 1.2 million shares times $48.87 per share, which equals $58.644 million.

The market value of the debt is calculated by multiplying the par value of the debt by the percentage it is trading at. Since the debt has a par value of $20.9 million and is trading at 105% of par, the market value of the debt is $20.9 million times 105%, resulting in $21.945 million.

For the weighted average cost of capital (WACC), we use the market values of equity and debt as weights. The total market value of the company is the sum of the market value of equity and the market value of debt, which is $58.644 million + $21.945 million = $80.589 million. The weight of equity in the WACC is $58.644 million divided by $80.589 million, while the weight of debt is $21.945 million divided by $80.589 million.