WACC and target weightsAfter 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	24	%
Preferred stock	14
Common stock equity	62
Total	100	%

The cost of debt is estimated to be 4.2%; the cost of preferred stock is estimated to be 10.5%; the cost of retained earnings is estimated to be14%; and the cost of new common stock is estimated to be 16%. All of these are after-tax rates. The company's debt represents 19%, the preferred stock represents 9%, and the common stock equity represents 72% 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.