Question

In 2015, Caterpillar Inc. had about 652 million shares outstanding. Their book value was $31.3 per share, and the market price was $73.50 per share. The company’s balance sheet shows that the company had $21.20 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 or Market value?

Answer 1

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.)

Book Value(D /V) = 21.20/[(31.3 x 0.652)+21.2] = 0.51

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.)

Market Value(D /V) = 21.20/[(73.5 x 0.652)+21.2] = 0.31

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

Book value or Market value?

Market value weights is generally used in WACC calculation since it has practical use.