Question

In 2015, Caterpillar Inc. had about 650 million shares outstanding. Their book value was $29.3 per share, and the market price was $72.50 per share. The company’s balance sheet shows that the company had $23.20 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

• Market value

Answer 1

(a)-Caterpillar’s book debt-to-value ratio

Caterpillar’s book debt-to-value ratio = Debt / [Debt + Book Value of Equity]

= $23.20 Billion / [$23.20 Billion + (0.650 Million Shares x $29.30 per share)]

= $23.20 Billion / [$23.20 Billion + $19.05 Billion]

= $23.20 Billion / $42.25 Billion

= 0.55

(b)- Caterpillar’s market debt-to-value ratio

Caterpillar’s book Market debt-to-value ratio = Debt / [Debt + Market Value of Equity]

= $23.20 Billion / [$23.20 Billion + (0.650 Million Shares x $72.50 per share)]

= $23.20 Billion / [$23.20 Billion + $47.13 Billion]

= $23.20 Billion / $70.33 Billion

= 0.33

(c)-Best measure to calculate the company’s cost of capital

“Market value” is the most appropriate measure to calculate the company’s cost of capital