SelfTestHomework_Topic3_Question.doc.docx

SelfTestHomework_Topic3_Question.doc.docx - Cost of Capital...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Cost of Capital and Company Valuation 1. In 2013 Caterpillar Inc. had about 648 million shares outstanding. Their book value was $27 per share, and the market price was $83.50 per share. The company's balance sheet shows that the company had $25.7 billion of long-term debt, which was currently selling near par value. a. What was Caterpillar's book debt-to-value ratio (the ratio of debt to total value)? Book Value= D/V= 25.7/(27x0.648) =0.59 b. What was its market debt-to-value ratio? Market value= D/V= 25.7/(83.50x0.648 )=0.32 c. Which of these two measures should you use to calculate the company's cost of capital? Market value is the proper measure, as it is determined by cash flows and forecasts, rather than accounting rules. 2. Here is a simplified balance sheet for Epicure Pizza (figures in $ millions): Assets Liabilities and Shareholders' Equity Current assets 80 Current liabilities 60 Fixed assets 125 Long-term debt 65 Equity 80 Total 205 Total 205 Note: There are 16 million shares outstanding. Epicure shares are currently priced at $12 each. a. You wish to calculate Epicure's WACC. What is the relevant figure for the company's debt ratio? WACC usually excludes current liabilities, thus the proper debt figure is $65 Million. b. You now realize that since Epicure issued its debt, interest rates have fallen substantially. Do you need to revise your measure of the debt ratio upward or downward? The market value of the debt will increase as interest rates decline thus the firm needs to revise its debt ratio.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern