1. Westerly Manufacturing has compiled the information shown in the following ta
ID: 2699587 • Letter: 1
Question
1. Westerly Manufacturing has compiled the information shown in the following table:
Source of Capital
Book Value
Market Value
After-tax Cost
Long-Term Debt
$4,000,000
$3,840,000
6.0%
Preferred Stock
$40,000
$60,000
13.0%
Common Stock Equity
$1,060,000
$3,000,000
17.0%
Totals
$5,100,000
$6,900,000
(a) Calculate the firm%u2019s weighted average cost of capital (WACC) using book value weights.
(b) Calculate the firm%u2019s weighted average cost of capital (WACC) using market value weights.
(c) Compare your answers found in parts (a) and (b) and briefly explain the differences. Other things equal, would you recommend that Westerly Manufacturing rely on its book value weights or market value weights in determining its WACC?
Source of Capital
Book Value
Market Value
After-tax Cost
Long-Term Debt
$4,000,000
$3,840,000
6.0%
Preferred Stock
$40,000
$60,000
13.0%
Common Stock Equity
$1,060,000
$3,000,000
17.0%
Totals
$5,100,000
$6,900,000
Explanation / Answer
Here is the preview of the solution, for full work I have given a dropbox link to download a excel file. Download the file from link below to look at the work.
https://www.dropbox.com/s/2ddw1a8lj015bj1/Westerly%20Manufacturing.xls
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