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 cost of capital.

b. Explain how the firm can use this cost in the investment decision-making process.

Source of capital Long-term debt Preferred stock Common stock equity Market value $950,000 $80,000 $650,000 Individual cost 7.4% 12.4% 17.3%