Question

WACC—Book weights???Ridge Tool has on its books the amounts and specific? (after-tax) costs shown in the following table for each source of? capital: (see chart all the way below)

a. Calculate the? firm's weighted average cost of capital using book value weights.

b.??Explain how the firm can use this cost in the investment? decision-making process.

a.??The? firm's weighted average cost of? capital, ra, using book value weights is ?%?. ?(Round to two decimal? places.)

b.??Explain how the firm can use this cost in the investment? decision-making process.???(Select the best answer? below.)

A. The WACC is the rate of return that the firm must receive on? short-term projects to maintain the value of the firm. The cost of capital can be compared to the dollar value for a project to determine whether the project is acceptable.

B. The WACC is the rate of return that the firm must receive on? long-term projects to maintain the value of the firm. The cost of capital can be compared to the return for a project to determine whether the project is acceptable.

C. The WACC is the rate of return that the firm must not exceed on? long-term projects to maintain the value of the firm. The cost of capital can be compared to the return for a project to determine whether the project is acceptable.

D. The WACC is the rate of return that the firm must exceed on? long-term projects to maintain the value of the firm. The cost of capital can be compared to the dollar value for a project to determine whether the project is acceptable.

Source of capital	Book value		Individual cost
?Long-term debt	? $900,000		6.4?%
Preferred stock	? $90,000		11.9%
Common stock equity	?$400,000		16.9%

Answer 1

A)Weighted Average cost of capital:

Total Capital: 900,000+90,000+400,000=1,390,000

Weight of debt(Wd)=900,000/1,390,000

Weight of Preferred stock(Wp): 90,000/1,390,000

Weight of Common stock(Wc):400,000/1,390,000

Weighted average cost of capital=Cost of Debt(Wd) + Cost of Preferred stock(Wp) + Cost of Common Stock(Wc)

=6.4%(900,000/1,390,000)+11.9%(90,000/1,390,000)+16.9%(400,000/1,390,0000)

=9.78%

B) Option B:The WACC is the rate of return that the firm must receive on long-term projects to maintain the value of the firm. The cost of capital can be compared to the return for a project to determine whether the project is acceptable.