Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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Chapter 9, Problem 9.13P

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.

Source of capital Market value Individual cost
Long-term debt $700,000 5.3%
Preferred stock 50,000 12.0
Common stock equity 650,000 16.0
  1. a. Calculate the firm’s WACC.
  2. b. Explain how the firm can use this cost in the investment decision-making process.
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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. b. Explain how the firm can use this cost in the investment decision-making process. a. The firm's weighted average cost of capital, ra, using market value weights is %. (Round to two decimal places.) Data Table (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.) Source of capital Market value Individual cost $700,000 $30,000 $600,000 Long-term debt 6.2% Preferred stock 11.9% Common stock equity 16.5% Print Done
Source of capital Long-term debt Preferred stock Common stock equity Market value $700,000 $70,000 $400,000 Individual cost 7.6% 12.4% 14.8%
The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table. Source of capital Market value Individual cost Long-term debt $700,000 5.3% Preferred stock    50,000 12.0    Common stock equity   650,000 16.0    a. Calculate the firm’s WACC. b. Explain how the firm can use this cost in the investment decision-making process. Please show your work.

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Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

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