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Calculating WACC in the given case

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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.

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Solution Summary

Solution determines the WACC values using market value and book value weights.

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Please refer attached file for the better clarity of tables.

A. Calculate the weighted average cost of capital using book-value weights.
Source of Capital Book Value Weight=Fraction of total value
Long-Term Debt $4,000,000 4000000/5100000=0.7843
Preferred Stock 40,000 40000/5100000=0.0078
Common Stock Equity 1,060,000 1060000/5100000=0.2078
Totals $5,100,000

After tax cost of Long-term debt=rd=6.0%
After tax ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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