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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
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 3.9%; the cost of preferred 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 24%, the preferred stock represents 6%, and the common stock equity represents 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 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. - X und to two decimal places.) Data table a to two decimal places.) below.) (Click on the icon here e in order to copy the contents of the data table below into a spreadsheet.) Target market Source of capital value weight Long-term debt 29% Preferred stock 11 Common stock equity 60 Total 100% expensive common stock component, 70%, versus the target weight of 60%. h lower than future expected costs. higher than future expected costs expensive common stock component, 70%, versus the target weight of 60%. Print Done
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