CHAPTER 9 The Cost of Capital 401 the On a. Calculate the WACC using book value weights. b. Calculate the WACC using market value weights. c. Compare the answers obtained in parts a and b. Explain the differences. P9-15 WACC and target weights After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table. 66 in Source of capital Long-term debt Preferred stock Common stock equity Total Target market value weight 30% 15 55 100% The cost of debt is 4.2%, the cost of preferred stock is 9.5%, the cost of retained earn- ings is 13.0%, and the cost of new common stock is 15.0%. All are after-tax rates. The company's debt represents 25%, the preferred stock represents 10%, and the common stock equity represents 65% of total capital on the basis of the current mar- ket values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock. a. Calculate the WACC on the basis of historical market value weights. b. Calculate the WACC on the basis of target market value weights. c. Compare the answers obtained in parts a and b. Explain the differences. LG 6 LG6 P9-16 Cost of capital Edna Recording Studios Inc. reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of 21%. a. If the market price of the common stock is $40 and dividends are expected to 6% per year for the foreseeable future, what is the required