Question twenty one:

Sports Directs balance sheet shows a total of $400 million long-term debt with a coupon rate of 10.00% and a yield to maturity of 5.00%. This debt currently has a market value of $500 million. The balance sheet also shows that the company has 100 million shares of common stock, and the book value of the common equity is $500 million. The current stock price is $10 per share; stockholders' required return, rs, is 12%; and the firm's tax rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate.

Determine the weighted average cost of capital (WACC) using: a. Book value weights b. Market value weights