Book Co. has 1.4 million shares of common equity with a par (book) value of $ 1.00 , retained earnings of $ 28.1 million, and its shares have a market value of $ 50.96 per share. It also has debt with a par value of $ 21.1 million that is trading at 105 % 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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Business

Vanessa Wong

25 March, 16:59

Book Co. has 1.4 million shares of common equity with a par (book) value of $ 1.00 , retained earnings of $ 28.1 million, and its shares have a market value of $ 50.96 per share. It also has debt with a par value of $ 21.1 million that is trading at 105 % 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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Answers (1)

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Jack Duran · Answer 1

The computations are shown below:

a. The market value of equity is

= $50.96 per share * 1,400,000 shares

= $71,344,000

b. The market value of debt is

= $105% * $21,100,000

= $22,155,000

c. Now the weights are as follows

Weight of equity is

= $71, 344,000 : ($71,344,000 + $22,155,000)

= 0.7630

And,

Weight of debt = 1 - 0.7630

= 0.237