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:

Earnings Philosophy

The underlying beliefs and principles that guide how an organization compensates its employees, reflecting values concerning fairness, performance, and the market.

Provincial Law

Legislation that is enacted and enforced by individual provinces within a federal system, addressing matters not exclusively reserved for the national government.

Non-specified Benefit Plan

An employee benefit plan that does not define specific benefits in advance but may provide a pool of funds for potential distribution.

Specified Benefit Plan

A retirement plan where the benefits to be received by employees are defined and specified in advance.