Ridge Tool has on its books the amounts and specific (after tax) costs shown in the following 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. Calculate the firm's weighted average cost of capital using book value weights.
b. Explain how the firm can use the cost in the investment decision-making process.