P914 similar to Question Help WACCBook weights and market we

P9-14 (similar to)

Question Help

WACC—Book weights and market weightsWebster Company has compiled the information shown in the following table:

.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.

P9-14 (similar to)

Question Help

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Source of capital Long-term debt Preferred stock Common stock equity Totals Book value $4,000,000 40,000 Market value 3,880,000 64,000 5,014,000 8,958.000 After-tax cost 896 13% 16% $ 55,100,000

Solution

Solution A. Calculation of WACC using Book value as weight:

Solution B: Calculation of WACC using Market value as weight:

Solution C: We can see from the above outcomes that the WACC using market values as weights is 2.81% higher than the WACC using book value as weights. This is mainly because there are differences between the book value and the market value of the stocks.

A	B	C	D	E
source	book value	weights	Individual cost of capital	weighted cost
(given)	(given)	(individual source of capital/ total capital)		(book value* weight)
		eg. (4000000/5100000)		(C*D)
long term weight	4000000	0.784313725	8	6.274509804
preferred stock	40000	0.007843137	13	0.101960784
equity	1060000	0.207843137	16	3.325490196
total	5100000	1		9.701960784