WACC and target weights Afler careful analysis, Dexter Beothers has determined that iss optimal capital structure is composed of the sources and target market value weights shown in the following table: The cost of debt is estimased to be 4.2\%; the cost of prelerred stock is estimated to be 11.2%; the cost of retained earnings is estimated to be 14.7%; and the cost of new common stock is estimated to be 16.7\%. All of these are after-tax rates. The company's debt represents 25%, the preferred stock represents 5%, and the common stock ecuity represerts 70% of total capital on the besis of the market values of the three components. The company expocts to have a significant amount of retained earrings avalable and does not expoct to sell any nerw common stock. a. Calculate the weighted average cost of capital on the basis of historical markef vatu weights. b. Calculate the weighted average cost of capital on the basis of target markef vaiue weights. c. Compare the answers obtained in parts a and b. Explain the differences. a. The weighted average cost of capital on the basis of historical market value weights is K. (Round to two decimal places.) b. The weighted average cost of capital on the basis of target market value weights is \%. (Round to two decimal places.) c. Compare the answers obtained in parts a and b. Explain the diferences. (Select the best answer below.) A. Using historical woights, the firm has a lower cost of capital because historical costs are often lowor than future expected costs. B. Using historical weights, the firm has a higher cost of capital becevse historical costs are often higher than future expected costs C. Using historical weights, the firm has a higher cost of capital due to the weighting of the more expensive common stock component, 70%, versus the target weight of 60%. D. Using historical weights, the firm has a lower cost of capital due to the weighting of the more expensive common stock component, 70%, versus the target weight of 60%. WACC and target weights After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table: The cost of debt is estimated to be 4.2%; the cost of preferred stock is estimated to be 11.2\%; the cost of retained eamings is estimated to be 14.7\%; and the cost of new common stock is estimated to be 16.7%. All of these are after tax ratns. The company's debt represents 25%, the preferred stock represents 5%, and the common stock equity repeesents 70% of total capital on the basis of the market values of the three components. The company expects to have a significant amount of retained eamings avalable and does not expect to sell any new common stock. a. Calculate the weight b. Calculate the weigh c. Compare the answo Data table (Click on the icon here D in order to copy the contents of the data table below a. The weighted avera (ite a spreadsheet.). b. The weighted avera c. Compare the answo A. Using historical 7 costs. B. Using historical od costs. C. Using historical pomponent, 70%, versus the target weight of 60%. D. Using historical omponent. 70%, versus the target weight of 60%
