WACC - Bolero, Inc., has compiled the following information on its financing costs:
Type of financing
Book value
Market Value
Cost
Short-type debt
$10,000,000
$11,000,000
6.8
Long-term-debt
3,000,000
3.50%
Common stock
6,000,000
26,000,000
14.5
Total
$19,000,000
$40,000,000
The company is in the 35 percent tax bracket and has a target debt–equity ratio of 60 percent. The target short-term debt/long-term debt ratio is 20 percent.
1. What is the company’s weighted average cost of capital using book value weights?
2. What is the company’s weighted average cost of capital using market value weights?
3. What is the company’s weighted average cost of capital using target capital structure weights?
4. What is the difference between WACCs? Which is the correct WACC to use for project evaluation?
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