Question

WACC-Book weights and market weights Webster Company has compiled the information shown in the following table: a. 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 - X (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) After-tax cost 9% Source of capital Long-term debt Preferred stock Common stock equity Totals Book value $4,000,000 40,000 1,060,000 $5,100,000 Market value $3,920,000 58,000 4,410,000 $8,388,000 11% 17% Print Done

Answer 1

1.
=(4000000*9%+40000*11%+1060000*17%)/5100000=10.678431372549%

2.
=(3920000*9%+58000*11%+4410000*17%)/8388000=13.2198378636147%

3.
WACC using market value weights is higer because of market value of equity being significantly higher than book value of equity