Describing weighted average cost of capital
Source of Capital Book Value Market Value After-tax cost
Long-term debt $4,000,000 $3,840,000 6.0%
Preferred stock 40,000 60,000 13.0%
Common stock equity 1,060,000 3,000,000 17.0%
Totals $5,100,000 $6,900,000
1. Compute the weighted average cost of capital using book value weights.
2. Compute the weighted average cost of capital using market value weights.
3. Compare the answers obtained in parts a and b. Describe the differences.
