President and CFO of Spellman Transportation Are Having a Disagreement

question 13

Multiple Choice

president and CFO of Spellman Transportation are having a disagreement about whether to use market value or book value weights in calculating the WACCSpellman'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 company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $65 millionThe 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:

Unit Product Cost

The total cost to produce one unit of a product, comprising both direct costs like materials and labor, and allocated indirect costs.

Variable Costing

A bookkeeping procedure that adds only variable production fees (including direct materials, direct labor, and variable manufacturing overhead) into the costs associated with products.

Unit Product Cost

The total cost to produce a single unit of product, including direct materials, direct labor, and allocated overhead.

Direct Labor Cost

The expense of labor that can be directly attributed to the production of goods or services.