WACCMarket

The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table:

Market Rate Value Individual Cost

Long-term debt $750,000 6.1%

Preferred stock $50,000 12.1%

Common stock equity $400,000 15.5%

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.