How the firm can use cost in investment decision-making

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

Source of Capital                Market Value            Individual Cost
Long Term Debt               $900,000                       7.9%
Preferred Stock                   $90,000                   9.9%
Common Stock Equity            $450,000               15.3%

Problem a. Calculate the firm's weighted average cost of capital.

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

Reference no: EM132662877

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