Problem: WAAC and Market Weights:
Webster Company has compiled the information show in the following table.
|
Source of Capital
|
Book Value
|
Market Value
|
After-Tax Cost
|
|
Long-Term Debt
|
$4,000,000
|
$3,840,000
|
6.0$
|
|
Preferred Stock
|
40,000
|
60,000
|
13.0%
|
|
Common Stock Equity
|
1,060,000
|
3,000,000
|
17.0%
|
|
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.