Sapp Trucking's Balance Sheet Shows a Total of Noncallable $45

question 46

Multiple Choice

Sapp Trucking'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 balance sheet also shows that 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, rs, 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%

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Definitions:

Substitution Effects

The change in the consumption pattern of goods due to a change in their prices, making consumers replace more expensive items with cheaper alternatives.

Downward-sloping

A descriptor often used for demand curves, indicating that as the price of a good or service decreases, the quantity demanded increases.

Law of Demand

The principle that there is an inverse relationship between the price of a good and the quantity demanded, holding other factors constant.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a specific price level.