Question

Homework: Score: 0 of 1 pt 46 of 9 (5 complete) HW Score: 55.56%, 5 of 9 pts P11-12 (similar to) Question Help Book value versus market value components. The CFO of DMI is trying to determine the company's WACC. Brad, a promising MBA, says that the company should use book value to assign the WACC components' percentages. Angela, a long-time employee and experienced financial analyst, says that the company should use market value to assign the components' percentages. The after-tax cost of debt is at 8.1%, the cost of preferred stock is at 11.31%, and the cost of equity is at 15.63%. Calculate the WACC using both the book value and the market value approaches with the information in the popup window: E. Which do you think is better? What is the book value adjusted WACC for DMI? % (Round to two decimal places.) 1 1 1 1 Enter your answer in the answer box and then click Check Answer 2 parts remaining Clear All Check Answer

Answer 1

WACC = Weighted Avg cost of Sources in Capital Structure:

WACC using book weights:

Source	Value	Weight	Cost	Wtd Cost
Debt	56000	0.595745	8.10%	4.83%
Preferred stock	14000	0.148936	11.31%	1.68%
Common stock	24000	0.255319	15.63%	3.99%
WACC	10.50%

WACC using Market weights:

Source	Value	Weight	Cost	Wtd Cost
Debt	$ 56,547.68	0.604321	8.10%	4.89%
Preferred stock	$ 14,068.60	0.15035	11.31%	1.70%
Common stock	$ 22,956.00	0.245329	15.63%	3.83%
WACC	10.43%

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