17.7 Value Company has compiled the following information on its financing costs:

Value is in the 34-percent tax bracket and has a target debt-equity ratio of 100 percent. Value’s managers would like to keep the market values of short-term and long-term debt equal.

a. Calculate the weighted average cost of capital for Value Company using i. Book-value weights ii. Market-value weights iii. Target weights

b. Explain the differences between the WACCs. What are the correct weights to use in the WACC calculation?

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Type of Financing Book Value Market Before-Tax Value Cost Long-term debt $ 5,000,000 $ 2,000,000 10% Short-term debt 5,000,000 Common stock 10,000,000 5,000,000 13,000,000 8 15 Total $20,000,000 $20,000,000