Question

The president and CFO of Spellman Transportation are having a disagreement about whether to use market...

The president and CFO of Spellman Transportation are having a disagreement about whether to use market value or book value weights in calculating the WACC. Spellman's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 8.00% and a yield to maturity of 7.00%. This debt currently has a market value of $50 million. The company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $55 million. The current stock price is $20.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax rate is 30%. 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 these two WACCs? (Show Work and use Excel to Solve)

Homework Answers

Answer #1

Calculate the WAAC using book and market weights as follows:

Book value weights are based on historical information which are against the current situations. But market value weights give WACC based on current market situations and used to calculate the correct weighted average cost of capital(WACC).

Formulas:

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The president and CFO of Spellman Transportation are having a disagreement about whether to use market...
The president and CFO of Spellman Transportation are having a disagreement about whether to use market value or book value weights in calculating the WACC. Spellman's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The company has 10 million shares of common stock, and the book value of the common equity (common stock plus...
Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon...
Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $27.50 per share; stockholders' required return, rs, is...
Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon...
Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The balance sheet also shows that the company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $27.50 per share; stockholders' required return, rs, is...
ABC Trucking's balance sheet shows a total of noncallable $38 million long-term debt with a coupon...
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...
ABC Trucking's balance sheet shows a total of noncallable $33 million long-term debt with a coupon...
ABC Trucking's balance sheet shows a total of noncallable $33 million long-term debt with a coupon rate of 6.80% and a yield to maturity of 6.80%. This debt currently has a market value of $55 million. The balance sheet also shows that the company has 13 million shares of common stock, and the book value of the common equity is $255.80 million. The current stock price is $21.60 per share; stockholders' required return, rs, is 16.25%; and the firm's tax...
ABC Trucking's balance sheet shows a total of noncallable $30 million long-term debt with a coupon...
ABC Trucking's balance sheet shows a total of noncallable $30 million long-term debt with a coupon rate of 6.70% and a yield to maturity of 6.40%. This debt currently has a market value of $50 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 $278.00 million. The current stock price is $25.25 per share; stockholders' required return, rs, is 16.35%; and the firm's tax...
Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon...
Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million. The balance sheet also shows that the company has 10 million shares of stock, and the stock has a book value per share of $5.00. The current stock price is $20.00 per share, and stockholders' required rate of return, rs,...
Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon...
Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million. The balance sheet also shows that the company has 10 million shares of stock, and the stock has a book value per share of $5.00. The current stock price is $20.00 per share, and stockholders' required rate of return, rs,...
Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon...
Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million. The balance sheet also shows that the company has 10 million shares of stock, and the stock has a book value per share of $5.00. The current stock price is $20.00 per share, and stockholders' required rate of return, rs,...
MV Corporation has debt with market value of $ 103 ?million, common equity with a book...
MV Corporation has debt with market value of $ 103 ?million, common equity with a book value of $ 105 ?million, and preferred stock worth $ 18 million outstanding. Its common equity trades at $ 46 per? share, and the firm has 5.5 million shares outstanding. What weights should MV Corporation use in its? WACC? The debt weight for the WACC calculation is ?%. ?(Round to two decimal? places.) The preferred stock weight for the WACC calculation is %. (Round...