Your boss has asked you to estimate your company's WACC. You have assembled the following information:

Current liabilities consist of short-term par value bank debt at 3% to finance seasonal assets. This debt is paid off in the off-season.

Your company has been experiencing very rapid earnings and dividend growth, though the market for your products has matured, and going forward you expect growth to be tied to the overall economy's growth. You also realize that the market and your company's stock have risen dramatically recently, and you seriously question whether the stock price is sustainable. Any new equity needed comes from internal sources.

Market information: 

Current 90-day T-hill rate ..................................................................2.25%

Historical 90-day T-hill rate .............................................................. 3.9%

Historical average 10-year risk-free bond rate ............................. 7.75%

Current 10-year risk-free bond rate ...............................................5.0%

Expected market return...................................................................11.0%

Expected long-term annual GOP growth rate ................................2%

a. Determine whether the weighting for each component cost of capital should be based on the existing market values or the target weighting. Explain your answer.

b. Calculate the WACC.

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Balance Sheet as at December 31, 2015 ($000s) Current assets Net fixed assets Current liabilities $10,000 $14,000 26,000 Long-term bonds 65,000 Total liabilities 40,000 Equity Total liabilities and equity 35,000 $75,000 Total assets $75,000 Additional company information: Beta 0.9 Current stock price $21 Most recent dividend $1.50 Bonds issued 5 years ago: $26 million par value, 20-year, 9% semi-annual interest, currently priced at 103; flotation costs are 2% Shares outstanding 6 million EPS and DPS past 5-year annual growth rate 10% Common share flotation costs 6% Target capital structure 60% equity/40% debt Tax rate 30% ROE, average past 5 years 18% Dividend payout ratio 30%