Question

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?

Answer 1

Explanation:

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