In 2015, Caterpillar Inc. had about 579 million shares outstanding. Their book v
ID: 2657460 • Letter: I
Question
In 2015, Caterpillar Inc. had about 579 million shares outstanding. Their book value was $40.3 per share, and the market price was $70.00 per share. The company’s balance sheet shows that the company had $27.50 billion of long-term debt, which was currently selling near par value.
a. What was Caterpillar’s book debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)
b. What was its market debt-to-value ratio? (Do not round intermediate calculations. Enter your answer as a decimal rounded to 2 decimal places.)
c. Which measure should you use to calculate the company’s cost of capital?
Book value
Market value
Explanation / Answer
Answer to Part a.
Book Value of Equity = 579 Million * $40.30
Book Value of Equity = $23,333.70 Million
Book Value of Debt = $27.50 Billion or $27,500 Million
Total Book Value = $23,333.70 Million + $27,500 Million
Total Book Value = $50,833.70 Million
Book Debt to Value Ratio = 27,500 / 50,833.70
Book Debt to Value Ratio = 0.54 times
Answer to Part b.
Market Value of Equity = 579 Million * $70.00
Market Value of Equity = $40,530 Million
Value of Debt = $27.50 Billion or $27,500 Million
Total Market Value = $40,530 Million + $27,500 Million
Total Market Value = $68,030 Million
Market Debt to Value Ratio = 27,500 / 68,030
Market Debt to Value Ratio = 0.40 times
Answer to Part c.
The company should use market value as it reflect current market situation of the company.
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