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Sapp Trucking’s balance sheet shows a total of $45 million debtwith a coupon rate of 7% and a yield to maturity of 6%. This debtcurrently has a market value of $50 million. The balance sheet alsoshows that the company has 10 million shares of common stock, andthe book value of the common equity is $65 million. The currentstock price is $22.50 per share; stockholders’ required return is14% and the firm’s tax rate is 40%. Your believe the WACC should bebased on the market value weights, but your manager thinks bookweights are more appropriate. (a) Calculate the WACC using marketvalue and book value weights. (b) How can you convince your managerto use market value weights instead of book value weights?
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