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Answer (B) is correct . The company should not accept projects that have a lower return than the after-tax weighted-average cost of capital, calculated as follows: ? Cost of Weighted Weight Capital Cost Long-term debt 60% ¡Á 7.1% = 4.26% Preferred stock 20% ¡Á 10.5% = 2.10% Common equity 20% ¡Á 14.2% = 2.84% Totals 100% 9.20%<
Answer (A) is incorrect because The threshold for accepting projects should be the weighted-average cost of all sources of capital, not just debt.
Answer (C) is incorrect because The WACC is determined by multiplying the cost of each component of capital by its proportion, not by taking their average.
Answer (D) is incorrect because The threshold for accepting projects should be the weighted-average cost of all sources of capital, not just common stock.