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Len [333]
3 years ago
9

The president and CFO of Spellman Transportation are having a disagreement about whether to use market value or book value weigh

ts in calculating the WACC. Spellman's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50 million. The company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 million. The current stock price is $22.50 per share; stockholders' required return, r s , is 14.00%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between these two WACCs?a. 1.55%b. 1.72%c. 1.91%d. 2.13%e. 2.36%
Business
1 answer:
Setler79 [48]3 years ago
8 0

Answer:

Difference = 2.36% (Option e)

Explanation:

Formula:

WACC = Re*(E/V) + Rd*(D/V)*(1-t)

<u>Data (In Million)                  Book Value                 Market Value </u>

E = Equity                           $65.00                        $225.00 ($22.50 x 10)

D = Debt                             $45.00                        $50.00

V = Value = E + D               $110.00                      $275.00

Re = Equity Rate                14%                            14%

Rd = Debt Rate                   6%                              6%

T = Tax Rate                      40%                             40%

WACC Book Value:

WACC = 14%*(65/110) + 6%*(45/110)*(1-0.40)  

WACC = 8.27273% + 1.47273%

WACC = 9.75%

WACC Market Value:

WACC = 14%*(225/275) + 6%*(50/275)*(1-0.40)  

WACC = 11.45455% + 0.65455 %

WACC = 12.11%

Difference = 12.11% - 9.75 = 2.36% (Option e)

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2 years ago
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Increase, Decrease

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3 years ago
The Poison Apple Diner had an average dinner cover charge of $8.75 during the month of September, when 3,000 atrons were served.
skelet666 [1.2K]

Answer:

0.583

Explanation:

Data provided in the question;

Average dinner charges = $8.75

Initial demand = 3,000 atrons

Increase in price = $0.50

Final demand = 2,900

Thus,

change in demand = 3,000 - 2,900 = 100

Now,

The price elasticity of demand = \frac{\textup{Percentage change in demand}}{\textup{Percentage change in price}}

also,

Percentage change in demand = \frac{\textup{Change in demand}}{\textup{Initial demand}}\times100\%

= \frac{\textup{100}}{\textup{3000}}\times100\%

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Percentage change in price =  \frac{\textup{Change in price}}{\textup{Initial price}}\times100\%

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The price elasticity of demand = \frac{\textup{3.33}\%}{\textup{5.714}\%}

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4 years ago
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Answer:

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Direct selling makes it hard to reach new customers and also entails spending an extensive time in trying to convince prospective customers before sales is made. Sadly, in some situations, some prospects do not buy in on the intended product and thus, no sale is made and time wasted.

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