**WACC—Book Weights and Market Weights**Webster Company has compiled the information shown in the following table: 1. **Calculate the weighted average cost of capital using book value weights.**2. **Calculate the weighted average cost of capital using market value weights.**3. **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.)---*Note:* The content prompts calculations and comparisons of the weighted average cost of capital (WACC) based on different weighting methods, with placeholders for data and results. **Data Table***Instructions:* Click on the icon to copy the contents of the data table below into a spreadsheet.| Source of Capital | Book Value | Market Value | After-Tax Cost ||-------------------------|-------------|--------------|----------------|| Long-term debt | $4,000,000 | $4,120,000 | 7% || Preferred stock | $40,000 | $61,000 | 13% || Common stock equity | $1,060,000 | $4,187,000 | 16% || **Totals** | **$5,100,000** | **$8,368,000** | |*Options available*: - Print- DoneThis table provides a breakdown of capital sources, their book and market values, and the associated after-tax costs. It includes long-term debt, preferred stock, and common stock equity, highlighting the financial structure of an organization.

WEIGHTED AVERAGE COST OF CAPITAL is the average cost to a company of capital. WACC is calculated by…

WACC-Book weights and market weights Webster 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.

WACC-Book weights and market weights Webster 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.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Related questions

Q: The formula to calculate EVA is Net operating profit - (invested capital x weighted average cost of…

A: EVA, or economic value profit, is a measure of a corporation's economic success that is based on…

Q: Which of the following statements is correct? Select one: OA. Working capital is the initial capital…

Q: The acid-test ratio is: A) current assets divided by current liabilities B) cash and current…

A: The ratio analysis helps to analyze the financial statements of the business on the basis of various…

Q: Indicate the effect of the transactions listed in the following table on total current assets,…

A: A cash dividend is declared and paid: Cash is decreasing. Which means current assets decrease and…

Q: Working Capital definition and formula Receivables definition and formula Inventory definition and…

A: Financial Statement which comprises Statement of P&L and Balance Sheet is the end product of the…

Q: Cost of capital refers to: a. The cost of borrowing money from financial institutions b. The cost of…

A: Cost of capital refers to the cost of financing a company's operations.

Q: Identify which ratio category is best described in each statement. • Ratios that help determine…

A: Ratio analysis is a financial analysis technique that involves calculating and interpreting various…

Q: What are the three ratios related to a Firm's asset management?

A: Asset management or turnover ratios: The asset management ratios are also termed as the turnover…

Q: Working capital is an indication of the firm’s ________.A. asset utilizationB. amount of noncurrent…

A: Working capital (WC) seems to be a financial statistic that indicates the operating liquidity…

Q: The three input ratios (not output) to the DuPont model of financial statement analysis are: a) Net…

A: Du-point Analysis is the method of measuring the performance of the company. It measures the return…

Q: ain why the required rate of return on a firm's assets must be equal to the weighted average cost of…

A: Weighted average cost of capital is the weighted cost of equity and weighted cost of debt after…

Q: Asset utilization ratios A. relate assets to sales. B. measure how much cash is available for…

A: Asset utilization ratio is financial ratio computed to determine the efficiency of total assets.

Q: The factor payment for the use of financial capital (loans and equity investments) is called...…

A: The cost of finance: Equity and debt are two sources of capital for any business. Investors who…

Q: Current assets minus current llabilities Is: Multiple Cholce Working capital. Financial leverage.…

A: Current assets means cash and cash equivalent and other assets which are realisable with in normal…

Q: io analysis involves calculations that use the data from the financial statements to evaluate the…

A: Ratios are very important in financial statement analysis and ratios are calculated based on the…

Q: What advantage do you see in compiling financial data into standardized statements like the Income…

A: Standardized statements also acknowledged as financial statements, these statements such as balance…

Q: The company cost of capital: measures the return that investors require from the company. is…

A: The company's cost of capital is the return that the investors expect in return for financing the…

Q: Distinguish between goal weights and historical weights in terms of how they are used to compute the…

A: Here Is The Answer:

Q: Define the current ratio and return on assets ratio. (b) State what financial management problem…

A: The current ratio is a financial ratio that measures a company's ability to pay its short-term…

Q: M Dening investment and trade-in opening investment by 2 and ad ng closing investment from the

A: Answer :Option D. Subtracting closing investment from the opening and dividing by 2 is correct…

Q: 3. The capital introduced by the owner will be treated as; Group of answer choices Liability…

A: Solution:-3 capital meaning:- Capital is the money which is used to start a business or which is…

Q: Do the following: (1) Assign a formula to (1) Tot. current assets, (2) Net fixed assets, (3) Total…

A: Here appropriate formulas need to be applied to find each of the “x”. For instance total current…

Q: The return on total assets measures A. profitability by combining the effects of the profit margin…

A: Profitability ratios are those ratio which shows the ratio of margins i.e. gross margin, net margin,…

Concept explainers

Cost of Capital

Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.

Capital Structure

Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.

Weighted Average Cost of Capital

The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.

Question

**WACC—Book Weights and Market Weights**

Webster Company has compiled the information shown in the following table:

1. **Calculate the weighted average cost of capital using book value weights.**
2. **Calculate the weighted average cost of capital using market value weights.**
3. **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.)

---

*Note:* The content prompts calculations and comparisons of the weighted average cost of capital (WACC) based on different weighting methods, with placeholders for data and results.

**Data Table**

*Instructions:* Click on the icon to copy the contents of the data table below into a spreadsheet.

| Source of Capital | Book Value | Market Value | After-Tax Cost |
|-------------------------|-------------|--------------|----------------|
| Long-term debt | $4,000,000 | $4,120,000 | 7% |
| Preferred stock | $40,000 | $61,000 | 13% |
| Common stock equity | $1,060,000 | $4,187,000 | 16% |
| **Totals** | **$5,100,000** | **$8,368,000** | |

*Options available*:
- Print
- Done

This table provides a breakdown of capital sources, their book and market values, and the associated after-tax costs. It includes long-term debt, preferred stock, and common stock equity, highlighting the financial structure of an organization.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: WEIGHTED AVERAGE COST OF CAPITAL

Step 2: solution a

Step 3: solution b

Solution

Step by step

Solved in 4 steps with 8 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

All of the following are the tools for Financial Analysis except: 1.Trend Analysis 2.Funds Flow Statements 3.Standard Costing 4.Ratio Analysis
The accounting records of Wall's China Shop reflected the following balances as of January 1, Year 2: Cash Beginning inventory Common stock Retained earnings The following five transactions occurred in Year 2: 1. First purchase (cash) 120 units @ $90 2. Second purchase (cash) 205 units @ $98 3. Sales (all cash) 350 units @ $197 4. Paid $13,950 cash for salaries expense 5. Paid cash for income tax at the rate of 25 percent of income before taxes $16, 800 17,600 (200 units @ $88) 15, 700 18,700 Required a. Compute the cost of goods sold and ending inventory, assuming (1) FIFO cost flow, (2) LIFO cost flow, and (3) weighted-average cost flow. b. Use a vertical model to show the Year 2 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average. (Hint: Record the events under an accounting equation before preparing the statements.) Complete this question by entering your answers in the tabs below. Req A Req B1 Cost of goods sold Ending inventory Req…
The balance sheet contributes to financial reporting by providing a basis for all of the following except Group of answer choices evaluating the capital structure of the enterprise. assessing the liquidity and financial flexibility of the enterprise. determining the increase in cash due to operations. computing rates of return.
A. Which of the following is most closely associated with the cost of using assets? a. Asset utilization b. Sales revenue c. Proportion of debt and equity d. Average price B. Which of the following is most closely associated with the return on management’s use of assets? a. Cost of capital b. Mix of equity types c. Prime lending rate d. # of products sold
Compute the cost of goods sold and ending inventory, assuming (1) FIFO cost flow, (2) LIFO cost flow, and (3) weighted-average cost flow. Then, compute the income tax expense for each method. Use a vertical model to show the 2018 income statement, balance sheet, and statement of cash flows under FIFO, LIFO, and weighted average. (Hint: Record the events under an accounting equation before preparing the statements.)
Which one of the following is a capital structure decision? Group of answer choices Determining the level of accounts receivables. Determining how many shares of stock to issue. Determining how much inventory to keep on hand. Deciding whether or not to purchase a new machine for the production line. Determining how much money should be kept in the checking account.
The Pet Store experienced the following events for the Year 1 accounting period: 1. Acquired $55,000 cash from the issue of common stock. 2. Purchased $78,000 of inventory on account. 3. Received goods purchased in Event 2 FOB shipping point; freight cost of $1,400 paid in cash. 4. Sold inventory on account that cost $44,000 for $83,000. 5. Freight cost on the goods sold in Event 4 was $1,200. The goods were shipped FOB destination. Cash was paid for the freight cost. 6. Customer in Event 4 returned $5,360 worth of goods that had a cost of $2,730. 7. Collected $68,060 cash from accounts receifable. 8. Paid $64,000 cash on accounts payable. 9. Paid $3,360 for advertising expense. 10. Paid $3,570 cash for insurance expense. Required a. Which of these events affect period (selling and administrative) costs? Which result in product costs? If neither, label the transaction NA. Transaction Cost
3. Explain the relationship between the weighted average cost of capital (WACC), the maximization of firm value, and financial decision making.
When performing vertical analysis of a balance sheet, the base amount is ________. A gross profit B total cash and cash equivalents C net income D total assets
How do I set this up? This is a few questions stuck together. Count as multiple questions I think. 4-12 Indicate the effect of the transactions listed in the following table on total current assets, current ration, and net income. Use (+) to indicate an increase, (-) to indicate a decrease, and (0) to indicate either no effect or an indeterminate effect. Be prepared to state any necessary assumptions and assume an initial current ratio of more than 1.0. Table for 4-12 Total Current Assets Current Ratio Effect on Net Income a Cash is acquired through issuance of additional stock. b Merchandise is sold for cash. c Federal income tax due for the previous year is paid. d A fixed asset is sold for less than book value. e A fixed asset is sold for more than book value. f Merchandise is sold on credit. g Payment is made to…

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS