Question

Williams, Inc., has compiled the following information on its financing costs:

  

Type of Financing	Book Value			Market Value			Cost
Short-term debt	$	15,000,000		$	14,000,000		4.2	%
Long-term debt		42,500,000			36,500,000		7.3
Common stock		12,000,000			99,000,000		13.1
Total	$	69,500,000		$	149,500,000

  

The company is in the 25 percent tax bracket and has a target debt-equity ratio of 70 percent. The target short-term debt/long-term debt ratio is 10 percent.

  

a.	What is the company’s weighted average cost of capital using book value weights? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the company’s weighted average cost of capital using market value weights? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.	What is the company’s weighted average cost of capital using target capital structure weights? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

    

d.	Which is the correct WACC to use for project evaluation?

    

A. Target weights

B. Book weights

C. Market weights

Answer 1

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