- Book Value Versus Market Value Components The Cfo Of Dmi Is Trying To Determine The Company S Wacc Brad A Promising M 1 (69.94 KiB) Viewed 44 times
What is the market value adjusted WACC for DMI?
Which do you think is better? (Select thebest response.)
A. The preferred choice is market value, which usesthe current price of the debt or equity in thecapital markets, the price at which investors currently buyor sell stocks and bonds. Market values are a better representationof a company's current capital structure, which wouldbe relevant for raising new capital.
B. The preferred choice is book value, which uses theoriginal price of the debt or equity in the capital markets,the price at which investors currently buy or sell stocks andbonds. Book value represents the true capital structure of the firmbased on the amount of capital originally invested in the firm.
Book value versus market value components. The CFO of DMI is trying to determine the company's WACC. Brad, a promising MBA, says that the company should use book value to assign the WACC components' percentages. Angela, a long-time employee and experienced financial analyst, says that the company should use market value to assign the components' percentages. The after-tax cost of debt is at 11.3%, the cost of preferred stock is at 15.02%, and the cost of equity is at 18.85%. Calculate the WACC using both the book value and the market value approaches with the information in the popup window:. Which do you think is better?
Data table Click on the Icon Current assets Long-term assets Total assets in order to copy its content into a spreadsheet. DMI Balance Sheet ($ in thousands) Current liabilities Long-term liabilities Bonds payable Outstanding Market Price $33,306 $68,694 $102,000 Owners' equity Debt 62,000 $1,047.49 Preferred stock Common stock Click on the Icon in order to copy its content into a spreadsheet. Market Information Total liabilities and owners' equity Preferred Stock 140,000 $108.96 $62,000 $0 $14,000 $26,000 $102,000 Common Stock 1,040,000 $33.76 I