Fran McClure of Alba Advisers is estimating the cost of capital of Frontier Corporation as part of her valuation analysis of Frontier. McClure will be using this estimate, along with projected cash flows from Frontier's new projects, to estimate the effect of these new projects on the value of Frontier. McClure has gathered the following information on Frontier Corporation: Current Year ($) Forecasted for Next Year ($) Book value of debt 50 50 Market value of debt 62 63 Book value of shareholders' equity 55 58 Market value of shareholders' equity 210 220 The weights that McClure should apply in estimating Frontier's cost of capital for debt and equity are, respectively:
a. wd = 0.200; we = 0.800.
b. wd = 0.185; we = 0.815.
c. wd = 0.223; we = 0.777.
Answer: c. wd = 0.223; we = 0.777.
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