Excersice:

Compare Trout, Inc. with Salmon Enterprises, using the following balance sheet of Trout and the market data of Salmon for the weights in the weighted average cost of capital:

Trout, Inc.
Current assets:	$2,000,000	Current liabilities:	$1,000,000
Long-term assets:	$7,000,000	Long-term liabilities:	$5,000,000
Total assets:	$9,000,000	Owners' equity:	$3,000,000
Salmon Enterprises
Bonds outstanding: 3,000 selling at $980.00
Common stock outstanding: 260,000 selling at $23.40 . If the after-tax cost of debt is 8.08.0% for both companies and the cost of equity is 12.0012.00%,which company has the higher WACC? 1. What is the book value adjusted WACC for Trout Inc. Answer 1: CALCULATION OF WEIGHTED AVERAGE COST OF CAPITAL FOR TROUT, INC. __________________________________________________________________________________________________ COMPONENT(1) AMOUNT (2) WEIGHT(3) AFTER TAX COST(4) WACC (5) = (3)X (4) DEBT $ 5,000,000 0.625 8% 0.050 EQUITY 3,000,000 0.375 12% 0.045 TOTAL 8,000,000 0.095 OR 9.5% Weights For Debt = 5,000,000/8,000,000 = 0.625 For Equity = 3,000,000/8,000,000 = 0.375 CALCULATION OF WACC OF SALMON COMPANY ________________________________________________________________________________________ COMPONENT(1) AMOUNT (2) WEIGHT(3) AFTER TAX COST(4) WACC (5) = (3)X (4) DEBT(3,000 x 980) $2,940,000 0.326 8% 0.026 EQUITY(260,000 x 23.40) 6,084,000 0.674 12% 0.080 TOTAL 9,024,000 0.106 OR10.6% Weights : For Debt = 2,940,000/9,024,000 = 0.326 For Equity : 6,084,000 x 9,024,000 = 0.674 WACC of Trout company is 9.5% and that of Salmon Company is 10.6%, Hence, Salmony Company WACC is higher than Trout, Inc. Book Value adjusted WACC for Trout Inc.: Weight fo debt x after tax cost of debt + Weight of equity x cost of equity = 625 X 8% + 0.375 X 12% = 0.05+0.045 = 0.095 or 9.5% Question 2: What is the market value adjusted WACC for Salmon Enterprises?