Question
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 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 components percentage for the WACC. Angela, a long-time employee and experienced financial analyst, says the company should use market value to assign the components. 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 market value approaches with the following information. Which do you think is better? Why?
DMI Company Balance Sheet (in thousands) $32,000 $66,000 Current Assets: Current Liabilities: Long-Term Assets: Long-Term Liabilities Bonds Payable $54,000 Owner's Equity Preferred Stock$12,000 Common Stock$32,000 $98,000 Total Assets: $98,000 Total L & OE Market Information Debt 54,000 $1085 Preferred Stock 120,000 $95.40 Common Stock Outstanding 1,280,000 Market Price $32.16Step by Step Solution
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