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Part 1

WACCBook

weights and market weightsWebster Company has compiled the information shown in the following table:

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.

a.Calculate the weighted average cost of capital using book value

weights.

b.Calculate the weighted average cost of capital using market value

weights.

c.Compare the answers obtained in parts a and

b.

Explain the differences.

Source of capital	Book value	Market value	After-tax cost
Long-term debt	$4,000,000		$3,960,000		7%
Preferred stock	40,000		60,000		12%
Common stock equity	1,060,000		3,636,000		16%
Totals	$5,100,000		$7,656,000