Question

In 2015, Caterpillar Inc. had about 579 million shares outstanding. Their book value was $40.3 per share, and the market price was $70.00 per share. The company’s balance sheet shows that the company had $27.50 billion of long-term debt, which was currently selling near par value.

a. What was Caterpillar’s book debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)

b. What was its market debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)

c. Which measure should you use to calculate the company’s cost of capital?

Book value

Market value

Answer 1

Answer to Part a.

Book Value of Equity = 579 Million * $40.30
Book Value of Equity = $23,333.70 Million

Book Value of Debt = $27.50 Billion or $27,500 Million

Total Book Value = $23,333.70 Million + $27,500 Million
Total Book Value = $50,833.70 Million

Book Debt to Value Ratio = 27,500 / 50,833.70
Book Debt to Value Ratio = 0.54 times

Answer to Part b.

Market Value of Equity = 579 Million * $70.00
Market Value of Equity = $40,530 Million

Value of Debt = $27.50 Billion or $27,500 Million

Total Market Value = $40,530 Million + $27,500 Million
Total Market Value = $68,030 Million

Market Debt to Value Ratio = 27,500 / 68,030
Market Debt to Value Ratio = 0.40 times

Answer to Part c.

The company should use market value as it reflect current market situation of the company.