Question

Sky INC, the company has the following information. It is a national consumer products company:

Liabilities and Equity	Book values	Target Capital Structure
Notes Payable	$200	3%
Long-term Debt	1,000	15%
Preferred Stock	500	5%
Common equity	4,200	77%

Assume that you are an analyst preparing to calculate SKY’s WACC and that the company’s target capital structure values above are unknown to you. Further, assume that SKY’s cost of debt and cost of equity values are significantly different from each other. How will your estimate of WACC be affected by using weights calculated from the known book values rather than the unknown target capital structure in your calculations?

Answer 1

weights of different capital structure sources has been provided in excel document. Now to calculate WACC we have to multiply the weights of respective capital structure item with its cost to arrive at weighted cost of such capital structure item and we have to add the all the weighted costs to arrive at WACC.

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