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%
Preferred stock 15
Common stock equity 55
The cost of debt is estimated to be 7.2%; the cost of preferred stock is estimated to be 13.5%; the cost of retained earnings is estimated to be 16.0%; and the cost of new common stock is estimated to be 18.0%. All of these are after-tax rates. The company’s debt represents 25%, the preferred stock represents 10%, and the common stock equity represents 65% of total capital on the basis of the market values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock.
a. Calculate the weighted average cost of capital on the basis of historical market value weights.
b. Calculate the weighted average cost of capital on the basis of target market value weights.
c. Compare the answers obtained in parts a and b. Explain the differences.
An entrepreneurial electrical engineer approached a large water utility with a proposal that promises to reduce the utility’s power bill by at least 15% through installat...May 11 2020
Think of a time in your life where you showed tenacity and the tenacity produced positive outcomes. Briefly relate the story and what you learned from the experience to y...Jul 23 2020
If the quantity demanded exceeds the quantity supplied in a market, what is the result?a. deadweight lossd. inefficiencyc. underproductiond. all of the above answers are correctMay 05 2021
61) Cells that manufacture and secrete aldosterone are located in theA) zona glomerulosa.B) renal cortex.C) pars distalis.D) pars nervosa.62) Cells that manufacture and s...Dec 23 2019
What is the difference between zero accounting profit and zero economic profit?May 11 2021
How do you calculate the net present value of a cash flow stream?Jun 04 2021
If a firm desires to finance new projects with 65% retained earnings and 35% debt, what is its weighted average cost of capital (WACC) if its equityâs required rate of ...Jun 09 2021
When are contractual limits on damages not enforced?Apr 17 2021
Write the preferred plural forms of the following nouns in the spaces provided. Use a dictionary if necessary.income tax ________Jun 15 2021
A 0.10-m NaCl aqueous solution has a higher boiling point than a 0.10-m MgSO4 aqueous solution. Explain why.Jun 15 2021