1. , do we use book value, market value or target value of capital structure for weights?

2. what is the WACC for BearKat Autos (rounded to two decimal places, pick the closest one)? Instructor Hint: We have come a long way! Now we are ready to calculate the WACC. Here is the formula:

WACC = wdrd(1 T) + wprp + wcrs

Please read the following relevant information from the question to figure out the weights: "BearKat Autos has a target capital structure of 40% debt, 5% preferred stock and 55% common equity and their current tax rate is 25%."

Wd is the percentage of debt that the company plans to use. In our question, the weight on debt is 40% or 0.4. So Wd is 0.4. The weight on the preferred stock is 5% or 0.05. So the wp is 0.05. The weight on common equity is wc, which is 0.55.

And we have already known the rest of the variables from the previous steps. You should be able to calculate the WACC. Cheers! )

3. Find the cost of common equity using the CAPM method. (Instructor Hint: Hello! the CAPM model! Sounds familiar? This is something we have learned from chapter 8. Chapter 10 also provides a detailed illustration of using CAPM. Here is the formula:

rs = rRF + (rM rRF)b

Please be aware that the question has already provided you with the market risk premium. Read the question: "The current risk free rate is .5% and the market risk premium is 4%.". So (Rm-Rrf ) is 4%. You don't need to deduct the risk free rate from this 4%.