Question

In 2018, Caterpillar Inc. had about 595 million shares outstanding. Their book value was $23.00 per share, and the market price was $154.80 per share. The company's balance sheet shows that the company had $24.8 billion of long-term debt, which was currently selling near par value.
a. What was Caterpillar's book debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)
b. What was its market debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)
c. Which measure should you use to calculate the company's cost of capital?
a. Book debt-to-value ratio
b. Markeet debt-to-value ratio
c. Measure

Answer 1

Answer and Explanation:

The computation is shown below;

(a)-Caterpillar’s book debt-to-value ratio

Caterpillar’s book debt-to-value ratio is

= Debt ÷ [Debt + Book Value of Equity]

= $24.80 Billion ÷ [$24.80 Billion + (0.595 Billion Shares × $23.00 per share)]

= $24.80 Billion ÷  [$24.80 Billion + $13.69 Billion]

= $24.80 Billion ÷ $38.49 Billion

= 0.64

(b)- Caterpillar’s market debt-to-value ratio

Caterpillar’s book Market debt-to-value ratio is

= Debt ÷ [Debt + Market Value of Equity]

= $24.80 Billion ÷ [$24.80 Billion + (0.595 Billion Shares × $154.80 per share)]

= $24.80 Billion ÷ [$24.80 Billion + $92.11 Billion]

= $24.80 Billion ÷ $116.91 Billion

= 0.21

(c)-Best measure to determine the company’s cost of capital is the market value