Question: Webster Company has compiled the information shown in the following?
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.
| Source of Capital |
Book Value |
Market Value |
After tax cost |
| Long-term debt |
$4,000,000 |
$4,120,000 |
0.07% |
| Preferred stock |
$40,000 |
$62,000 |
0.11% |
| Common stock equity |
$1,060,000 |
$4,484,000 |
0.15% |
| Totals |
$5,100,000 |
$8,666,000 |
|