WACC Market value weights 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. . Explain how the firm can use this cost in the investment decision-making process.
WACC Market value weights 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. . Explain how the firm can use this cost in the investment decision-making process.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### Capital Structure and Costs
This table provides a breakdown of the sources of capital, detailing their market values and individual costs. It's a useful representation for understanding how different types of funding contribute to the overall capital structure of a firm.
#### Breakdown
1. **Long-term Debt**
- **Market Value:** $700,000
- **Individual Cost:** 7.6%
Long-term debt is often used to finance large projects. It typically offers lower interest rates compared to equity financing, making it a cost-effective option.
2. **Preferred Stock**
- **Market Value:** $70,000
- **Individual Cost:** 12.4%
Preferred stock is a type of equity that provides dividends and has priority over common stock in the event of liquidation.
3. **Common Stock Equity**
- **Market Value:** $400,000
- **Individual Cost:** 14.8%
Common stock represents ownership shares in a company. It carries higher risk for investors because dividends are only paid after obligations to preferred shareholders are met.
### Summary
The table highlights the differences in cost associated with each source of capital. Long-term debt appears to be the least expensive option, while common stock equity is the most costly. This information is critical for financial managers when making decisions about funding strategies to optimize the capital structure.
![**WACC—Market Value Weights**
The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table:
**Tasks:**
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, \( r_a \), using market value weights is [ ]%. (Round to two decimal places.)
---
**Graph/Diagram Explanation:**
There is an icon that likely represents or links to a table containing data necessary for calculating the WACC. Ensure calculations are made based on the provided data in the table linked via the icon.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F553f4f5a-ebc3-465d-ae10-30fadeaa7064%2F98bc7cd8-3748-4f88-a4d1-47f716ba0105%2Fk3mslu4_processed.png&w=3840&q=75)
Transcribed Image Text:**WACC—Market Value Weights**
The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table:
**Tasks:**
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, \( r_a \), using market value weights is [ ]%. (Round to two decimal places.)
---
**Graph/Diagram Explanation:**
There is an icon that likely represents or links to a table containing data necessary for calculating the WACC. Ensure calculations are made based on the provided data in the table linked via the icon.
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