FIN 419 ASSIST Perfect Education/fin419assist.cofi FIN 419 ASSIST Perfect Education/fin419assist.cofi | Page 49

ANSWER:
Chapter 11 – Q12
12. Book value versus market value components. The CFO of DMI
is trying to determine the company’s WACC. Brad, a promising
MBA, says that the company should use book value to assign the
components percentage for the WACC. Angela, a long-time
employee and experienced financial analyst, says the company
should use market value to assign the components. The after-tax
cost of debt is at 7%, the cost of preferred stock is at 11%, and the
cost of equity is at 14%. Calculate the WACC using both the book
value and market value approaches with the following information.
Which do you think is better? Why?
Chapter 16
9. Finding the WACC. Monica is the CFO of Cooking for Friends
(CFF) and uses the pecking order hypothesis (POH) philosophy
when she raises capital for company projects. Currently, she can
borrow up to $600,000 from her bank at a rate of 8.5%, float a bond
for $1,100,000 at a rate of 9.25%, or issue additional stock for
$1,300,000 at a cost of 17%. What is the WACC for CFF if Monica
chooses to invest: a. $1,000,000 in new projects? b. $2,000,000 in new
projects? c. $3,000,000 in new projects?