Question

WACClong dashBook weights and market weights   Webster Company has compiled the information shown in the following​ table: LOADING....

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in order to copy the contents of the data table below into a​ spreadsheet.)

Source of capital	Book value		Market value		​After-tax cost
​Long-term debt	​$4 comma 000 comma 0004,000,000		​$3 comma 960 comma 0003,960,000		77​%
Preferred stock	40 comma 00040,000		56 comma 00056,000		1212​%
Common stock equity	1 comma 060 comma 0001,060,000		2 comma 735 comma 0002,735,000		1414​%
Totals	Modifying $ 5 comma 100 comma 000 with double underline$5,100,000		Modifying $ 6 comma 751 comma 000 with double underline$6,751,000

a.  Calculate the weighted average cost of capital using book value weights. b.  Calculate the weighted average cost of capital using market value weights. c.  Compare the answers obtained in parts a and b. Explain the differences. a.  The​ firm's weighted average cost of capital using book value weights is nothing​%. ​(Round to two decimal​ places.)

Answer 1

(a)-The firm's weighted average cost of ​capital using book value weights

Source	Book Value ($)	Weight to total book value [Book Value / Total market value]	Individual Cost	Weighted Cost [Individual Cost x Weight]
​Long-term debt	40,00,000	0.78431	7.00%	5.49%
Preferred stock	40,000	0.00784	12.00%	0.09%
Common stock equity	10,60,000	0.20784	14.00%	2.9%1
TOTAL	91,40,000	1.00000		8.49%

“Hence, the firm's weighted average cost of capital using book value weights will be 8.49%”

(b)-The firm's weighted average cost of ​capital using market value weights

Source	Market Value ($)	Weight to total market value [Market Value / Total market value]	Individual Cost	Weighted Cost [Individual Cost x Weight]
​Long-term debt	39,60,000	0.58658	7.00%	4.11%
Preferred stock	56,000	0.00830	12.00%	0.10%
Common stock equity	27,35,000	0.40513	14.00%	5.67%
TOTAL	1,410,000	1.00000		9.88%

“Hence, the firm's weighted average cost of capital using market value weights will be 9.88%”