46. Promo Pak has compiled the following financial data: Source of Capital Book
ID: 2647749 • Letter: 4
Question
46. Promo Pak has compiled the following financial data:
Source of Capital
Book Value
Market Value
Cost
Long-Term Debt
$10,000,000
$8,500,000
5.0%
Preferred Stock
1,000,000
1,500,000
14.0%
Common Stock Equity
9,000,000
15,000,000
20.0%
$20,000,000
$25,000,000
a. Calculate the weighted average cost of capital using the book value weights.
b. Calculate the weighted average cost of capital using the market value weights.
T/F
______ 3. In using the cost of capital, it is important that it reflects the historical cost of raising funds over
the long run.
Source of Capital
Book Value
Market Value
Cost
Long-Term Debt
$10,000,000
$8,500,000
5.0%
Preferred Stock
1,000,000
1,500,000
14.0%
Common Stock Equity
9,000,000
15,000,000
20.0%
$20,000,000
$25,000,000
Explanation / Answer
a. Calculate the weighted average cost of capital using the book value weights.
WACC = Weight of Common Stock* Cost of Common Stock + Weight of Preferred Stock* Cost of Preferred Stock + Weight of Debt* After Tax cost of Debt
WACC = 9/20*20% + 1/20*14% + 10/20*5%
WACC = 12.20%
b. Calculate the weighted average cost of capital using the market value weights
WACC = Weight of Common Stock* Cost of Common Stock + Weight of Preferred Stock* Cost of Preferred Stock + Weight of Debt* After Tax cost of Debt
WACC = 15/25*20% + 1.5/25*14% + 8.5/25*5%
WACC = 14.54%
3) In using the cost of capital, it is important that it reflects the historical cost of raising funds over the long run
Answer
False
Note : In using the cost of capital, it is important that it reflects the Market value of raising funds over the long run
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.