Compare Trout, Inc. with Salmon Enterprises, using the balance sheet of Trout an

Question

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

Trout, Inc.

Current assets:

$1,777,778

Current liabilities:

$1,493,768

Long-term assets:

$6,222,222

Long-term liabilities:

$4,462,578

Total assets:                       

$8,000,000

Owners' equity:

$2,043,654

Salmon Enterprises

If the after-tax cost of debt is 10.8% for both companies and the cost of equity is 15.97%, which company has the higher WACC? Please show how to find book value adjusted and market value adjusted for the two companies.

Trout, Inc.

Current assets:

$1,777,778

                              

Current liabilities:

$1,493,768

Long-term assets:

$6,222,222

Long-term liabilities:

$4,462,578

Total assets:                       

$8,000,000

Owners' equity:

$2,043,654

Salmon Enterprises

Bonds outstanding: 3,000 selling at $1,046.45 Common stock outstanding: 260,000 selling at $34.86

Explanation / Answer

Trout, Inc.
D = 1,493,768 + 4,462,578 = 5,956,346
E = 2,043,654
WACC = (5,956,346/8,000,000)*10.8 + (2,043,654/8,000,000)*15.97 = 12.120711
WACC = 12.12%

Salmon Enterprises
D = 1,046.45*3,000 = 3,139,350
E = 34.86*260,000 = 9,063,600
A = 3,139,350 + 9,063,600 = 12,202,950
WACC = (3,139,350/12,202,950)*10.8 + (9,063,600/12,202,950)*15.97 = 14.64%

Salmon Enterprises has higher WACC

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