Bolero has compiled the following information on its financing costs:
Type of Financing Book Value Market Value Cost
Long-term debt $5,000,000 $2,000,000 10%
Short-term debt $5,000,000 $5,000,000 8%
Common Stock $10,000,000 $13,000,000 15%
Total $20,000,000 $20,000,000
Bolero is in the 34 percent tax bracket. Calculate the weighted average cost of capital (WACC) for Bolero using
1. Book value weights
2. Market value weights.
First we need to calculate the different proportions:
Book Value Proportions:
Long Term Debt = 5/20 = .25
The solution answers the question below.