Question

ne Score: 0 of 1 pt VOIR SE 8 of 11 (5 complete) P9-13 (similar to) HW Score: 41 82%, 46 of 11 pts WACC Market value weights Question Help The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table a. Calculate the firm's weighted average cost of capital 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 market value weight is (Round to two decimal places) Enter your answer in the answer box and then click Check Answer part remaining Clear All This course (FINA 3313 Spring 2020-Thompson) is based on Zutter/Smart: Principles of Managerul Finance Brie Be Terms of Use Pr i cContightanan Education Licht o come $ 5 9 search

Answer 1

Answer A)

Total Capital = Tong Term Debt + Preferred Stock + Common Stock

= 800,000 + 30,000 + 500,000

= 1,330,000

WACC = Cost of Equity * Weight of Equity + Cost of Debt after tax * Weight of Debt + Cost of Preferred Stock * Weight of Preferred Stock

WACC = 15.2% * 500,000 / 1,330,000 + 6.6% * 800,000 / 1,330,000 + 12.7% * 30,000 / 1330,000

= 9.97%

Answer B)

WACC ca be used in Decision making as a bench mark. For Example if an Investment gives a return which is less than the cost of capital is not to be considered while a return over and above the Cost of Capital is to be considered as profitabe.

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