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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: B The cost of debt is estimated to be 4.1%; the cost of preferred stock is estimated to be 9.2%; the cost of retained earnings estimated to be 12.7%; and the cost of new common stock is estimated to be 14.7%. All of these are after-tax rates. The company's debt represents 18%, the preferred stock represents 8%, and the common stock equity represents 74% 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 Data Table - X (Round to two decimal places.) (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Target market Source of capital value weight Long-term debt 23% Preferred stock 13 Common stock equity 64 Total 100%

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