Question
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 8%
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 | 8% | ||||
| Preferred stock | 40,000 | 56,000 | 12% | ||||
| Common stock equity | 1,060,000 | 4,399,000 | 16% | ||||
| Totals | $5,100,000 | $8,295,000 | |||||
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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Equity Valuation And Portfolio Management
Authors: Frank J. Fabozzi, Harry M. Markowitz
1st Edition
047092991X, 9780470929919
