Q1) Ridge Tool has on its books amounts and specific (after tax) costs given in the table for each source of capital,
|
Source of capital
|
Book value
|
Specific cost
|
|
Long term debt
|
$700,000
|
5.30%
|
|
Preferred stock
|
$50,000
|
12
|
|
Common stock equity
|
650,000
|
16
|
a. Compute firm's weighted average cost of capital by using book value weights.
b. Describe how firm can use cost in investment decision-making process.