Question
Sky INC, the company has the following information. It is a national consumer products company: Liabilities and Equity Book values Target Capital Structure Notes Payable
Sky INC, the company has the following information. It is a national consumer products company:
Liabilities and Equity | Book values | Target Capital Structure |
Notes Payable | $200 | 3% |
Long-term Debt | 1,000 | 15% |
Preferred Stock | 500 | 5% |
Common equity | 4,200 | 77% |
Assume that you are an analyst preparing to calculate SKYs WACC and that the companys target capital structure values above are unknown to you. Further, assume that SKYs cost of debt and cost of equity values are significantly different from each other. How will your estimate of WACC be affected by using weights calculated from the known book values rather than the unknown target capital structure in your calculations?
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