Question

Book Co has 1.6 million shares of common equity with a par (book) value of $1.20,...

Book Co has 1.6 million shares of common equity with a par (book) value of $1.20, retained earnings of $29.6 million, and its shares have a market value of $49.99 per share. It also has debt with a par value of $18.3 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?

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Answer #1

1. Market value of Equity = Total shares outstanding x Current Market price of share

= 1,600,000 x 49.99 = 79984000

2. Market value of Debt= Par value of debt * Trading premium /100

= 18.849 million

3.TotalValue of firm = (1.6*1.2) + 29.6 + 18.3 = 49.82 million

Weight of Equity = (1.6*1.2) + 29.6. / 49.82 = 0.63

Weight of debt = 18.3/49.82= 0.37

The books values of equity + retained earnings are considered when calculating the cost of equity.

And book value of debt for the cost of debt .

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