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.

Source of capital

Target market value weight

Long$-$term debt

$30\%$

Preferred stock

$15$

Common stock equity

$55$

Total

$100\%$

The cost of debt is $4\mathrm{.}2\%,$ the cost of preferred stock is $9\mathrm{.}5\%,$ the cost of retained earnings is $13\mathrm{.}0\%,$ and the cost of new common stock is $15\mathrm{.}0\%.$ All are after$-$tax rates. The company$$s debt represents $25\%,$ the preferred stock represents $10\%,$ and the common stock equity represents $65\%$ of total capital on the basis of the current 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.

Calculate the WACC on the basis of historical market value weights.

Calculate the WACC on the basis of target market value weights.

Compare the answers obtained in parts a and b$.$ Explain the differences.