Question

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

  

Type of Financing	Book Value			Market Value			Cost
Short-term debt	$	12,400,000		$	12,700,000		2.9	%
Long-term debt		23,000,000			24,800,000		6.0
Common stock		9,400,000			60,000,000		11.8
Total	$	44,800,000		$	97,500,000

  

The company is in the 22 percent tax bracket and has a target debt-equity ratio of 65 percent. The target short-term debt/long-term debt ratio is 15 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?

    

• Target weights

• Market weights

• Book weights

Answer 1