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You assign your newly hired analyst to calculate the weights for the cost of capital. He is unsure and uses book value weights in calculating
You assign your newly hired analyst to calculate the weights for the cost of capital. He is unsure and uses book value weights in calculating the WACC. You let him know that he needs to use market value weights to calculate WACC. Your firm's balance sheet shows a total of noncallable $65 million long-term debt with a coupon rate of 8.25% and a yield to maturity of 7.5%. This debt currently has a market value of $105 million. The company has 10 million shares of common stock, and the book value of the common equity (common stock plus retained earnings) is $55 million. The current stock price is $28.50 per share; stockholders' required return, rs, is 12.00%; and the firm's tax rate is 30%. What is the difference between the two WACCs in using book and market value respectively
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