WACC- Book weights Ridge Tool has on its books the amounts and specific (afer-ta
ID: 2618533 • Letter: W
Question
WACC- Book weights Ridge Tool has on its books the amounts and specific (afer-tax) costs shown in the following table for each source of capitat 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, using book value weights is L-196. (Round to two decimal places ) b. Explain how the fim can use this cost in the investment decision-making process (Select the best answer below.) O A. 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 O B. 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 ? C. 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 O D· 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 return for a project to determine whether the project is acceptable compared to the dollar value for a project to determine whether the project is acceptable. compared to the return for a project to determine whether the project is acceptable compared to the dollar value for a project to determine whether the project is acceptable.Explanation / Answer
WACC = weight of debt * after tax cost of debt + weight of preferred stock * cost of preferred stock + weight of equity * cost of equity
weight of debt = value of debt/value of firm = .9/1.36
weight of preferred sotck = .06/1.36
weight of equity = .4/1.36
WACC = (.9/1.36 * 7.5 + .06/1.36*10.8 + .4/1.36 * 17.6)%
= 10.62%
For 2nd question correct option is c.
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