Williams, Inc., has compiled the following information on its financing costs: Type of Financing Book Value Market Value Cost Short-term debt $ 12,400,000 $ 12,700,000 2.9 % Long-term...

50.1K

Verified Solution

Question

Finance

Williams, Inc., has compiled the following information on itsfinancing costs:

  Type of Financing Book Value Market Value Cost
  Short-term debt $ 12,400,000 $ 12,700,000 2.9 %
  Long-term debt 23,000,000 24,800,000 6.0
  Common stock 9,400,000 60,000,000 11.8
  Total $ 44,800,000 $ 97,500,000

The company is in the 22 percent tax bracket and has a targetdebt-equity ratio of 65 percent. The target short-termdebt/long-term debt ratio is 15 percent.

a.
What is the company’s weighted average cost of capital usingbook value weights? (Do not round intermediate calculationsand enter your answer as a percent rounded to 2 decimal places,e.g., 32.16.)
b. What is the company’s weighted average cost of capital usingmarket value weights? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)
c. What is the company’s weighted average cost of capital usingtarget capital structure weights? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)

d.
Which is the correct WACC to use for project evaluation?

Target weights
Market weights
Book weights

Answer & Explanation Solved by verified expert

4.1 Ratings (610 Votes)

See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Williams, Inc., has compiled the following information on itsfinancing costs: Type of FinancingBook ValueMarket ValueCost Short-term debt$12,400,000$12,700,0002.9% Long-term debt23,000,00024,800,0006.0 Common stock9,400,00060,000,00011.8 Total$44,800,000$97,500,000 The company is in the 22 percent tax bracket and has a targetdebt-equity ratio of 65 percent. The target short-termdebt/long-term debt ratio is 15 percent. a.What is the company’s weighted average cost of capital usingbook value weights? (Do not round intermediate calculationsand enter your answer as a percent rounded to 2 decimal places,e.g., 32.16.)b.What is the company’s weighted average cost of capital usingmarket value weights? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)c.What is the company’s weighted average cost of capital usingtarget capital structure weights? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.) d.Which is the correct WACC to use for project evaluation? Target weightsMarket weightsBook weights

Type of Financing	Book Value		Market Value		Cost
Short-term debt	$	12,400,000	$	12,700,000	2.9	%
Long-term debt		23,000,000		24,800,000	6.0
Common stock		9,400,000		60,000,000	11.8

Total	$	44,800,000	$	97,500,000

a.	What is the company’s weighted average cost of capital usingbook value weights? (Do not round intermediate calculationsand enter your answer as a percent rounded to 2 decimal places,e.g., 32.16.)
b.	What is the company’s weighted average cost of capital usingmarket value weights? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)
c.	What is the company’s weighted average cost of capital usingtarget capital structure weights? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)