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

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.

------------------------------------------------------

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 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.

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 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.

Data Table . X in order to copy the contents of the data table below (Click on the icon here into a spreadsheet.) Source of capital Long-term debt Preferred stock Common stock equity Totals Book value $4,000,000 40,000 1,060,000 $5,100,000 Market value $4,160,000 55,000 2,947,000 $7,162,000 After-tax cost 8% 11% 17% Print Done