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Homework answers / question archive / 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

Finance

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.

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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.