Expert Q&A; Done part 2 Arab United Company has compiled the information shown i

Question

Expert Q&A; Done part 2 Arab United Company has compiled the information shown in the following table Source of capital Book value Market value After tax Long term debt Preferred stock Common dtock Total 8000000 80000 21200000 10200000 768000 120000 6000000 13800000 6% 13.0 17.0 Required: a. using book value weights and the market value weights Caculate the weighted average cost of capital b. Compare your answers obtained in parts a, determine what is the preferred approach and make an in-depth analysis why you peefer this approach

Explanation / Answer

a. WACC using book value as weight = (8/29.28)*6%+(0.08/29.28)*13%+(21.20/29.28)*17%= 0.139836 WACC using market value as weight = (7.68/13.8)*6%+(0.12/13.8)*13%+(6/13.8)*17%= 0.108435 b. We will prefer the market value WACC because the book value is the sunk cost or past cost which have less importance and market value is the current cost of the instruments issued which shows the current value of the instrument. Thus, WACC calculated through market value is more update cost of all instruments.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.