Webster Company has compiled the information shown in the following table.
Source of captial Book value Market value After-tax cost
Long-term debt $4,000,000 $3,840,000 6.00%
Preferred stock 40,000 60,000 13
Common stock equity 1,060,000 3,000,000 17
Totals $5,100,000 $6,900,000
a. Calculate the weighted average cost of capital using book value weights.
b. Calculate the weighted average cost of capital using market value weights.
c. Compare the answers obtained in parts a and b. Explain the differences.