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Book value versus market value components. Compare​ Trout, Inc. with Salmon​ Enterprises, using the balance sheet...

Book value versus market value components. Compare​ Trout, Inc. with Salmon​ Enterprises, using the balance sheet of Trout and the market data of Salmon for the weights in the weighted average cost of​ capital:  

Trout, Inc.

Current assets   $2,000,000
Long-term assets   $7,000,000
Total assets   $9,000,000
Current liabilities   $1,414,565
Long-term liabilities   $5,158,329
Owners' equity   $2,427,106

Salmon Enterprises

Bonds outstanding: 3,000 selling at $1,033.27

Common stock outstanding: 260,000 selling at $25.55

If the​ after-tax cost of debt is 8.2% for both companies and the cost of equity is 12.51%, which company has the higher​ WACC?

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Answer #1

Trout Inc

Total value = Long term liabilities + Equity

= 5158329+2427106

=7585435

WACC = Weight of debt * cost of debt + weight of equity*cost of equity

= 8.2%*5158329/7585435 + 12.51%*2427106/7585435

=9.58%

Salmon Enterprises

Market value of debt= 3000*1033.27=3099810

Market value of equity = 260000*25.55=6643000

Total value= 9742810

WACC = Weight of debt * cost of debt + weight of equity*cost of equity

= 8.2%*3099810/ 9742810 + 12.51%*6643000 /9742810

=11.14%

Salmon Enterprises has the higher WACC

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