1. Westerly Manufacturing has compiled the information shown in the following ta
ID: 2707340 • 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
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
Westerly Manufacturing has compiled the information shown in the following table: Calculate the firm's weighted average cost of capital (WACC) using book value weights. Calculate the firm's weighted average cost of capital (WACC) using market value weights. 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?Explanation / Answer
a) WACC = (4000/5100)*0.06 + 40/5100*0.13 + 1060/5100 *0.17 = 8.34%
B) WACC = (3840/6900)*0.06 + (60/6900)*0.13+ (3000/6900)*0.17 = 10.84%
C) SINCE common stock equity got increased .. our WACC increased.
company should rely on market values. since they are close to actual and also it will help us setting a higher MARR.
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