Promo Pak has compiled the following financial data: Source of Capital Book Valu
ID: 2783690 • Letter: P
Question
Promo Pak has compiled the following financial data:
Source of Capital Book Value Market Value Cost
Long-term debt $ 8,000,000 $ 8,500,000 5.0%
Preferred stock 500,000 750,000 12.0
Common stock equity 9,000,000 15,000,000 16.0
------------ ------------
$17,500,000 $24,250,000
a. Calculate the weighted average cost of capital using book value weights.
b. Calculate the weighted average cost of capital using market value weights.
Explanation / Answer
Computation of weights of Book Value
Particulars
Book Value
%
Long-term debt
$ 8,000,000
46%
Preferred stock
$ 500,000
3%
Common stock equity
$ 9,000,000
51%
Total
$ 17,500,000
100%
Computation of Weights of Market Value
Particulars
Market Value
%
Long-term debt
$ 8,500,000
35%
Preferred stock
$ 750,000
3%
Common stock equity
$ 15,000,000
62%
Total
$ 24,250,000
100%
a. Calculate the weighted average cost of capital using book value weights.
Ke= (Wd x Kd) +( Wp x Kp) +(We x Ke)
=(46% x 5%) +( 3% x 12%) +(51%x 16%)
=2.29% +0.34% + 8.23%
=10.86%
b. Calculate the weighted average cost of capital using market value weights.
Ke= (Wd x Kd) +( Wp x Kp) +(We x Ke)
=(35% x 5%) +( 3% x 12%) +(62%x 16%)
=1.75% +0.37% + 9.90%
=12.02%
Computation of weights of Book Value
Particulars
Book Value
%
Long-term debt
$ 8,000,000
46%
Preferred stock
$ 500,000
3%
Common stock equity
$ 9,000,000
51%
Total
$ 17,500,000
100%
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