Promo pak has compiled the following financial data

Question

1. Promo Pak has compiled the following financial data:

(a) Calculate the weighted average cost of capital using book value weights.

(b) Calculate the weighted average cost of capital using market value weights.

Source of Capital                        Book Value             Market Value             Cost

Long-term debt                            $10,000,000             $8,500,000              5.0%

Preferred stock                                1,000,000                1,500,000               14.0           

Common stock equity                     9,000,000              15,000,000              20.0

                             $20,000,000           $25,000,000