Weighted Average Cost of Capital. Valie Enterprises, Inc., has compiled the following investments:
|
Type of Capital
|
Book Value
|
Market Value
|
After-Tax Cost
|
|
Long-term debt
|
$3,000,000
|
$2,800,000
|
4.8%
|
|
Preferred stock
|
102,000
|
150,000
|
9.0%
|
|
Common stock
|
1,108,000
|
2,500,000
|
13.0%
|
|
$4,210,000
|
$5,450,000
|
|
(a) Calculate the weighted average cost of capital, using (1) book value weights and (2) market value weights. (b) Explain the difference in the results obtained in (a).