P9-14 (similar to) Question Help WACC — Book weights and market weights Webster

Question

P9-14 (similar to)

Question Help

WACC—Book weights and market weightsWebster Company has compiled the information 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 using market value weights.

c.Compare the answers obtained in parts a and b.

Explain the differences.

P9-14 (similar to)

Question Help

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Source of capital Long-term debt Preferred stock Common stock equity Totals Book value $4,000,000 40,000 Market value 3,880,000 64,000 5,014,000 8,958.000 After-tax cost 896 13% 16% $ 55,100,000

Explanation / Answer

Solution A. Calculation of WACC using Book value as weight:

Solution B: Calculation of WACC using Market value as weight:

Solution C: We can see from the above outcomes that the WACC using market values as weights is 2.81% higher than the WACC using book value as weights. This is mainly because there are differences between the book value and the market value of the stocks.

A B C D E source book value weights Individual cost of capital weighted cost (given) (given) (individual source of capital/ total capital) (book value* weight) eg. (4000000/5100000) (C*D) long term weight 4000000 0.784313725 8 6.274509804 preferred stock 40000 0.007843137 13 0.101960784 equity 1060000 0.207843137 16 3.325490196 total 5100000 1 9.701960784

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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