Book value versus market value components.

The CFO of DMI is trying to determine the company's WACC. Brad, a promising MBA, says that the company should use book value to assign the WACC components' percentages. Angela, a long-time employee and experienced financial analyst, says that the company should use market value to assign the components' percentages. The after-tax cost of debt is at 7.9% the cost of preferred stock is at 11.61% and the cost of equity is at 14.76 % Calculate the WACC using both the book value and the market value approaches with the information in the popup window:

Which do you think is better?

What is the book value adjusted WACC for DMI?

_____

(Round to two decimal places.)

What is the market value adjusted WACC for DMI?

_____

(Round to two decimal places.)

Which do you think is better?(Select the best response.)

A. The preferred choice is market value, which uses the current price of the debt or equity in the capital markets, the price at which investors currently buy or sell stocks and bonds. Market values are a better representation of acompany's current capital structure, which would be relevant for raising new capital.

B. The preferred choice is book value, which uses the original price of the debt or equity in the capital markets, the price at which investors currently buy or sell stocks and bonds. Book value represents the true capital structure of the firm based on the amount of capital originally invested in the firm.

Data Table DMI Balance Sheet ($ in thousands) Current assets $33,959 $70,041 Current liabilities Long-term liabilities $0 Long-term assets Bonds payable Owners' equity $65,000 Preferred stock $14,000 $25,000 Common stock Total liabilities and owners' equity Total assets $104,000 $104,000 Market Information Outstanding Market Price Debt 65,000 $926.19 Preferred Stock 140,000 $104.72 1,000,000 $37.69 Print Done