WACC-Book weights and market weights Webster Company has compiled the informatio
ID: 2799375 • Letter: W
Question
WACC-Book weights and market weights Webster Company has compiled the information shown in the following table . Calculate the weighted average cost of capital using book value weights b. Calculate the weighted average cost of capital using market value weights c. Compare the answers obtained in parts a and b. Explain the differences a. The firm's weighted average cost of capital using book value weights is (Round to two decimal places) Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) source of capital Longterm debt Preferred stock Common stock equity Totals Book value S4 000.000 40.000 1060.000 $5,100.000 After tax cost 9% 11% 16% Market value SA 160,000 54,000 4.855.000 $9.069,000 Print Done Enter your answer in the answer box and then click Check Answ remaining Clear AllExplanation / Answer
Answer a.
Weight of Long-term Debt = $4,000,000 / $5,100,000
Weight of Long-term Debt = 78.44%
Weight of Preferred Stock = $40,000 / $5,100,000
Weight of Preferred Stock = 0.78%
Weight of Common Stock Equity = $1,060,000 / $5,100,000
Weight of Common Stock Equity = 20.78%
WACC = 78.44%*9% + 0.78%*11% + 20.78%*16%
WACC = 10.47%
Answer b.
Weight of Long-term Debt = $4,160,000 / $9,069,000
Weight of Long-term Debt = 45.87%
Weight of Preferred Stock = $54,000 / $9,069,000
Weight of Preferred Stock = 0.60%
Weight of Common Stock Equity = $4,855,000 / $9,069,000
Weight of Common Stock Equity = 53.53%
WACC = 45.87%*9% + 0.60%*11% + 53.53%*16%
WACC = 12.76%
Answer c.
WACC is higher using market value as compared to WACC using book value as weight of common stock equity is higher in part (b).
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