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The following information is for DEF, Inc. a national consumer products company: Liabilities and Equity Book values Target Capital Structure Notes Payable $200 1% Long-term

The following information is for DEF, Inc. a national consumer products company:

Liabilities and Equity

Book values

Target Capital Structure

Notes Payable

$200

1%

Long-term Debt

1,000

10%

Preferred Stock

500

10%

Common equity

4,200

79%

Assume that you are an analyst preparing to calculate DEFs WACC and that the companys target capital structure values above are unknown to you. Further, assume that DEFs 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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