Book value versus market value components. The CFO of DMI is trying to determine the companys 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%, the cost of preferred stock is at 11%, and the cost of equity is at 14%. Calculate the WACC using both the book value and the market value approaches with the following information. Which do you think is better? Why?

DMI Balance Sheet ($in thousands)

Current Assets 32,000 Current Liabilities $0

Long-term assets 66,000 Long term liabilities

Total assets 98,000 Bonds Payable $54,000

Owners' Equity

Preferred Stock $12,000

Common Stock $32,000

Total liabilities and owners' equity 98,000

Market Information

DebtPreferred Stock Common Stock

Outstanding 54,000 120,000 1,280.000

Market Price 1,085 $95.40 $32.16