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Market values and? after-tax costs of various sources of capital used by Ridge Tool are shown in the following? table: Long-term debt $750,000 7
Market values and? after-tax costs of various sources of capital used by Ridge Tool are shown in the following? table:
Long-term debt $750,000 7.5%
Preferred stock $60,000 11.9%
Common stock equity $450,000 15.5%
1) Calculate the? firm's weighted average cost of capital.
2) Explain how the firm can use this cost in the investment? decision-making process.
Expert Solution
1) Weighted average cost of capital (WACC) = 10.57%
2) The WACC is the minimum cost of capital / discount rate that should be compared to the return for a project to determine whether the project is acceptable or not. If expected return on a project is higher than WACC the project should be accepted and when the expected return is lower than the WACC the project should be rejected.
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