In 2015, Caterpillar Inc. had about 581 million shares outstanding. Their book v
ID: 2789088 • Letter: I
Question
In 2015, Caterpillar Inc. had about 581 million shares outstanding. Their book value was $38.3 per share, and the market price was $71.00 per share. The company’s balance sheet shows that the company had $26.20 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
Book Value of equity = 581 million × $38.30
= $22,252.30 Million.
Market Value of equity = 581 million × $71
= $41,251 Million.
Market value of of debt = Book Value of debt = $26,200 million.
Book value of total assets = $22,252.30 + $26,200
= $48,452.30.
Book Value of total assets is $48,452.30.
Market value of total assets = $41,251 + $26,200
= $67,451
Market Value of total assets is $67,451
a.
Book debt-to-value ratio = $26,200 / $48,452.30
= 54.07%
Book debt-to-value ratio is 54.07%.
b.
Market debt-to-value ratio = $26,200 / $67,451
= 38.84%
Market debt-to-value ratio is 38.84%.
c.
To calculate cost of capital, market value weight should be use.
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