Question

WACClong dash—Book weights and market weights   Webster Company has compiled the information shown in the following​ table: LOADING... . 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 nothing​%. ​(Round to two decimal​ places.)

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 (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 Long-term debt Preferred stock Common stock equity Totals Book value $4,000,000 40,000 1,060,000 $5,100,000 Market value After-tax cost $3,840,000 60,000 3,000,000 $6,900,000 5% 13% Print Done Enter

Answer 1

(a)-Weighted average cost of capital (WACC) using book value weights

Capital Structure	Bok Value	Weight to Total Book Value	After-Tax Cost of Capital	WACC [WACC = Cost of Capital x Weight]
Long term Debt	40,00,000	0.7844	6.00%	4.71%
Preferred Stock	40,000	0.0078	13.00%	0.10%
Common Equity	10,60,000	0.2078	17.00%	3.53%
TOTAL	51,00,000	1.0000		8.34%

“Weighted average cost of capital (WACC) using book value weight = 8.34%”

(b)-Weighted average cost of capital (WACC) using market value weights

Capital Structure	Market Value	Weight to Total Market Value	After-Tax Cost of Capital	WACC [WACC = Cost of Capital x Weight]
Long term Debt	38,40,000	0.5565	6.00%	3.34%
Preferred Stock	60,000	0.0087	13.00%	0.11%
Common Equity	30,00,000	0.4348	17.00%	7.39%
TOTAL	69,00,000	1.0000		10.84%

“Weighted average cost of capital (WACC) using market value weight = 10.84%”

(c)-Analysis

The Weighted average cost of capital using the market value approach will be always greater than the Weighted average cost of capital under book value approach, its because, the current market price per share will be more than the book value per share which will results for a higher weight to be applied for the cost of capital and finally this will results in a higher Weighted average cost of capital using the market value approach.