WACC- Book weights and market weights. Webster Company has compiled the informat
ID: 2722164 • Letter: W
Question
WACC- Book weights and market weights. Webster Company has compiled the informaton shown in the following table:
a.) Calculate the weighted average cost of capital using book value weights.
b.) Calculate the weighted average cost of capital usign market value weights.
c.) Compared the answers obtained in parts A and B. Explain the differences.
Source of capital book value Market value After Tax cost Long term debt $4,000,000 $4,200,000 8% Preferred stock 40,000 64,000 12% Common stock equity 1,060,000 3,116,000 18% Totals $5,100,000 $7,380,000Explanation / Answer
Book Value weights Market Value weights
Long Term Debt $ 4,000,000 0.784 $ 4,200,000 0.569
Preferred stock $ 40,000 0.008 64,000 0.009
Common stock $ 1,060,000 0.208 3,116,000 0.422
WACC book value 0.784*0.08+0.008*0.12+0.208*0.18=0.0627+0.00096+0.03744=0.10110 or 10.11%
WACC market value =0.569*0.08+0.009*0.12+0.422*0.18=0.04552+0.00108+0.07596=0.12256 or 12.26%
the difference the WACCs of book value and market value is because of the differences the values ,all the market values are greater than the book values.
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