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Problem:

A balance sheet shows a total of non callable $41 million long-term debt with a coupon rate of 8.10% and a yield to maturity of 8.50%. This debt currently has a market value of $52 million. The balance sheet also shows that the company has 9 million shares of common stock, and the book value of the common equity is $167.15 million. The current stock price is $21.35 per share; stockholders' required return, rs, is 12.80%; and the firm's tax rate is 34.00%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate.

Required:

Question 1: What is the difference between the WACCs using market value and the book value? Explain comprehensively and provide step by step solution.

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Category:- Basic Finance
Reference No.:- M91147221

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