Question

WACClong dashMarket value weights   The market values and​ after-tax costs of various sources of capital used by Ridge Tool are shown in the following​ table:

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in order to copy the contents of the data table below into a​ spreadsheet.)

Source of capital	Market value		Individual cost
​Long-term debt	​$750 comma 000750,000		6.96.9​%
Preferred stock	​$60 comma 00060,000		12.412.4​%
Common stock equity	​$600 comma 000600,000		16.416.4​%

   a. Calculate the​ firm's weighted average cost of capital. b.  Explain how the firm can use this cost in the investment​ decision-making process. a.  The​ firm's weighted average cost of​ capital, r Subscript a​, using market value weights is nothing​%. ​(Round to two decimal​ places.)

Answer 1

The firm's weighted average cost of ​capital using market value weights

Source	Market Value ($)	Weight to total market value [Market Value / Total market value]	Individual Cost	Weighted Cost [Individual Cost x Weight]
​Long-term debt	7,50,000	0.53191	6.90%	3.67%
Preferred stock	60,000	0.04255	12.40%	0.53%
Common stock equity	6,00,000	0.42553	16.40%	6.98%
TOTAL	1,410,000	1.00000		11.18%

“Hence, the firm's weighted average cost of capital using market value weights will be 11.18%”