WACCBookweights 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		$4,080,000		9%
Preferred stock	40,000		54,000		12%
Common stock equity	1,060,000		3,201,000		16%
Totals	$5,100,000		$7,335,000

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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.)

O 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. OB. 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. O 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