WACC and sarget weights Ater careu anss, Dexder Brothers has cetermined that s o
ID: 2618227 • Letter: W
Question
WACC and sarget weights Ater careu anss, Dexder Brothers has cetermined that s optimal capital structure is compesed ot te sources and target market value weights shown in the folowing table The cost of debt?estimated to be 73%.thecost ot preterred stock estmated 50 be 1429kthe cost of retaned earrings estmated to bet&7%, and the cost of new common stock estrated to be 187%AIofthese are aner-Sax rates The company's debt es esents ?6% ? e pretened stock epresents 7%, and the co mon stock e ut epresents 77% of total ca tal on the basis ofthe market values ofthe mee components The company expects to have ? t icant ar o t gretar ed ea n s any new Calculate the weghted average cost of capital on the basis of hationical manet value weghts b. Caiculate thhe weighted average cost of capital on thve basis off target market value weights C. Compare the answers obtained in parts a andb. Explain the diferances Data Table a. the wegned average cost of capta, on the basi, of histonea, market va- t18[ % Round to two decmw places) b. The weighted average cost of captal on the bass of target mantvauts isRound to u deimal places) Click on the icon located on the top-right comer of the data table below in orde copy its contents into a spreadsheet O A Using hisorical weigts them has a lower cost of captal because isorical costs ane oen lower than fure pected costs OB. Using historical weights, the fim has a higher cost of capital because historical costs are ofan higher than futune axpected costs oc. using histoncal wegts the firm has a higher cost of capitaan tothe unring ofthe moreexpensive common stock component 77% versus the target wept of ?O. ??¡ng histoncal we Sthe firm has a lower cost of capta du tothe weghtingofthe mor. expensive common nock component. T7%, versus the target wegmof57% Prefered sock Common stock equity 100% Print DoneExplanation / Answer
A-
source
weight
cost
weight*cost
debt
0.16
7.3
1.168
preferred
0.07
14.2
0.994
equity
0.77
16.7
12.859
WACC
sum of weight *cost
15.02
B-
source
weight
cost
weight*cost
debt
0.21
7.3
1.533
preferred
0.12
14.2
1.704
equity
0.67
16.7
11.189
WACC
sum of weight *cost
14.43
C-
Answer is C
A-
source
weight
cost
weight*cost
debt
0.16
7.3
1.168
preferred
0.07
14.2
0.994
equity
0.77
16.7
12.859
WACC
sum of weight *cost
15.02
B-
source
weight
cost
weight*cost
debt
0.21
7.3
1.533
preferred
0.12
14.2
1.704
equity
0.67
16.7
11.189
WACC
sum of weight *cost
14.43
C-
Answer is C
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