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		Individual cost
Long-term debt	$800,000		5.8%
Preferred stock	$40,000		11.1%
Common stock equity	$550,000		16.8%

.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.(Select the best answer below.)

A.

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 dollar value for a project to determine whether the project is acceptable.

B.

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 compared to the return for a project to determine whether the project is acceptable.

C.

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 compared to the dollar value for a project to determine whether the project is acceptable.

D.

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 compared to the return for a project to determine whether the project is acceptable.