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

question 69

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 $24.50 per share;stockholders' required return,r_s,is 14.00%;and the firm's tax rate is 25%.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) 2.62%
• B) 2.28%
• C) 1.87%
• D) 2.19%
• E) 3.11%

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Definitions:

Breach

The violation of a law, duty, or other form of agreement.

Warranty

A guarantee provided by a manufacturer or seller regarding the condition of a product and the promise to repair or replace defective parts within a specified period.

Replevin

A legal action to recover personal property that has been wrongfully taken or retained.

Cover

In contracts, especially concerning the sale of goods, the act of obtaining replacement goods or services when a seller fails to fulfill their obligations.