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.

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 Summary

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

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Thank you.

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A. What is the company's cost of equity capital?
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SECURITY MARKET VALUE REQUIRED RATE OF RETURN
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PREFERRED STOCK $10 Million

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a. What is the cost of equity?
b. If the Corp. converts to 25 % debt,what will cost of equity be? 50 %?
c. What is shadow's WACC for part b: 25 % and 50 %.

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HERE ARE SOME HINTS

See attached file for full problem description.
Company B has the present capital structure (see values and market data in attached file) which is considered optimal.
Calculate the company's weighted average cost of capital (WACC) using book value weights and market value weights.

You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC?
a. 9.4