Webster Company has compiled the information shown in the following​ table attached: . 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
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Webster Company has compiled the information shown in the following​ table attached:
.
 
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.
Data table
(Click on the icon here P in order 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
$3,880,000
7%
Preferred stock
40,000
55,000
13%
Common stock equity
1,060,000
3,657,000
17%
Totals
$5,100,000
$7,592,000
Print
Done
Transcribed Image Text:Data table (Click on the icon here P in order 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 $3,880,000 7% Preferred stock 40,000 55,000 13% Common stock equity 1,060,000 3,657,000 17% Totals $5,100,000 $7,592,000 Print Done
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