Sapp Trucking’s balance sheet shows a total of $45 million debt with a coupon rate of...

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Sapp Trucking’s balance sheet shows a total of $45 million debtwith a coupon rate of 7% and a yield to maturity of 6%. This debtcurrently has a market value of $50 million. The balance sheet alsoshows that the company has 10 million shares of common stock, andthe book value of the common equity is $65 million. The currentstock price is $22.50 per share; stockholders’ required return is14% and the firm’s tax rate is 40%. Your believe the WACC should bebased on the market value weights, but your manager thinks bookweights are more appropriate. (a) Calculate the WACC using marketvalue and book value weights. (b) How can you convince your managerto use market value weights instead of book value weights?

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a Calculation of WACC using Book value weights Particulars Weight Cost of capital WACC Debt 041 36 1476 Equity 059 14 827 Total WACC 1 176 9746 Kd or cost of debt Total debt is 45 million and Total equity is 65 million 110 million Weight of debt 45 million 110 million 041 Yield to maturity is 6 after tax cost will be 6 1040 36 See Answer

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Sapp Trucking’s balance sheet shows a total of $45 million debtwith a coupon rate of 7% and a yield to maturity of 6%. This debtcurrently has a market value of $50 million. The balance sheet alsoshows that the company has 10 million shares of common stock, andthe book value of the common equity is $65 million. The currentstock price is $22.50 per share; stockholders’ required return is14% and the firm’s tax rate is 40%. Your believe the WACC should bebased on the market value weights, but your manager thinks bookweights are more appropriate. (a) Calculate the WACC using marketvalue and book value weights. (b) How can you convince your managerto use market value weights instead of book value weights?