WACCBook weights and market weights. Webster Company has compiled the information shown in the following table:

Source of capital	Book value		Market value		After-tax cost
Long-term debt	$4,000,000		$3,840,000		7%
Preferred stock	40,000		54,000		11%
Common stock equity	1,060,000		3,784,000		14%
Totals	$5,100,000		$7,678,000

a.Calculate the weighted average cost of capital using book value

weights.

b.Calculate the weighted average cost of capital using market value

weights.

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

Answer the following:

a.The firm's weighted average cost of capital using book value weights is __% (Round to two decimal places.)

b.The firm's weighted average cost of capital using 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.)

a) The book value approach yields a lower cost of capital because the costs of the components of the capital structure are calculated using the prevailing market prices. Since the common stock is selling at a higher value than its market value, the cost of capital is much higher when using the book value weights.

b) The market value approach yields a higher cost of capital because the costs of the components of the capital structure are calculated using the prevailing market prices. Since the common stock is selling at a higher value than its book value, the cost of capital is much higher when using the market value weights.

c) The market value approach yields a lower cost of capital because the costs of the components of the capital structure are calculated using the prevailing market prices. Since the common stock is selling at a lower value than its book value, the cost of capital is much lower when using the market value weights.

d) The book value approach yields a higher cost of capital because the costs of the components of the capital structure are calculated using the prevailing market prices. Since the common stock is selling at a lower value than its market value, the cost of capital is much higher when using the book value weights.