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Zagrot Trucking’s balance sheet shows a total of noncallable $45 million long-term debt with a coupon...

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Finance

Zagrot Trucking’s balance sheet shows a total of noncallable $45million long-term debt with a coupon rate of 8.00% and a yield tomaturity of 6.00%. This debt currently has a market value of $100million. The balance sheet also shows that the company has 20million shares of common stock, and the book value of the commonequity (common stock plus retained earnings) is $650 million. Thecurrent stock price is $100 per share; stockholders' requiredreturn, rs, is 13.00%; and the firm's tax rate is 21%.The CFO thinks the WACC should be based on market value weights,but the president thinks book weights are more appropriate. What isthe difference between these two WACCs?

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4.4 Ratings (612 Votes)
MV WACC MV of equityPrice of equitynumber of shares outstanding MV of equity10020000000 2000000000 MV of BondPar valuebonds outstandingage of par MV of Bond100045000222222222222222 100000000 MV of    See Answer
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Zagrot Trucking’s balance sheet shows a total of noncallable $45million long-term debt with a coupon rate of 8.00% and a yield tomaturity of 6.00%. This debt currently has a market value of $100million. The balance sheet also shows that the company has 20million shares of common stock, and the book value of the commonequity (common stock plus retained earnings) is $650 million. Thecurrent stock price is $100 per share; stockholders' requiredreturn, rs, is 13.00%; and the firm's tax rate is 21%.The CFO thinks the WACC should be based on market value weights,but the president thinks book weights are more appropriate. What isthe difference between these two WACCs?

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