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WACCBook weights and market weightsWebster Company has compiled the information shown in the following table: . Source of capital Book value Market value After-tax cost
WACCBook weights and market weightsWebster 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 | $4,200,000 | 6% | |||
| Preferred stock | 40,000 | 60,000 | 12% | |||
| Common stock equity | 1,060,000 | 5,056,000 | 18% | |||
| Totals | $5,100,000 | $9,316,000 | ||||
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.
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