Question
1. Westerly Manufacturing has compiled the information shown in the following table: Source of Capital Book Value Market Value After-tax Cost Long-Term Debt $4,000,000 $3,840,000
1. Westerly Manufacturing has compiled the information shown in the following table:
| Source of Capital | Book Value | Market Value | After-tax Cost |
| Long-Term Debt | $4,000,000 | $3,840,000 | 6.0% |
| Preferred Stock | $40,000 | $60,000 | 13.0% |
| Common Stock Equity | $1,060,000 | $3,000,000 | 17.0% |
| Totals | $5,100,000 | $6,900,000 |
|
(a) Calculate the firm%u2019s weighted average cost of capital (WACC) using book value weights.
(b) Calculate the firm%u2019s weighted average cost of capital (WACC) using market value weights.
(c) Compare your answers found in parts (a) and (b) and briefly explain the differences. Other things equal, would you recommend that Westerly Manufacturing rely on its book value weights or market value weights in determining its WACC?
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Portfolio Performance Measurement And Benchmarking
Authors: Jon Christopherson, David Carino, Wayne Ferson
1st Edition
0071496653, 978-0071496650
