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 6.9%; the cost of preferred stock is estimated to be 14.2%, the cost of retained earnings is estimated to be 16.7%, and the cost of new common stock is estimated to be 18.7%. All of these are after-tax rates. The company's debt represents 25%, the preferred stock represents 8%, and the common stock equity represents 67% of total capital on the basis of the market values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock a. Calculate the weighted average cost of capital on the basis of historical market value weights. b. Calculate the weighted average cost of capital on the basis of target market value weights c. Compare the answers obtained in parts a and b. Explain the differences Data table - (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) Source of capital Long-term debt Preferred stock Common stock equity Total Target market value weight 30 % 13 57 | 100% Print Done .. The weighted average cost of capital on the base of historical market value weights is 0% (Round to two decimal places) D. 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 differences (Select the best answer below) OA. Using historical weights the firm has a lower cost of capital due to the weighting of the more expensive common stock component 67% versus the tatget weight of 57% OB. Using historical weights the firm has a higher cost of capital because historical costs are often higher than future expected costs OC. Using historical weights the firm has a higher cost of capital due to the weighting of the more expensive common stock component 67% versus the target weight of 57% OD. Using historical weights the firm has a lower cost of capital because historical costs are often lower than future expected costs