WACC and target weights After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table.
Source of capital | Target market value weight |
Long-term debt | 30% |
15 | |
Common stock equity | 55 |
Total | 100% |
The cost of debt is 4.2%, the cost of preferred stock is 9.5%, the cost of
- a. Calculate the WACC on the basis of historical market value weights.
- b. Calculate the WACC on the basis of target market value weights.
- c. Compare the answers obtained in parts a and b. Explain the differences.
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Principles of Managerial Finance, Student Value Edition (15th Edition) (The Pearson Series in Finance)
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