P9–13 WACC: Book weights Ridge Tool has on its books the amounts and specific (aftertax)

costs shown in the following table for each source of capital.

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.

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Source of capital Long-term debt Book value Individual cost $700,000 5.3% Preferred stock 50,000 12.0 Common stock equity 650,000 16.0