Choice "B" is correct. Generally speaking, the financial manager should establish hurdle rates for capital investments at or above the weighted-average cost of capital to ensure that the company receives a return equal to its costs of long-term capitalization.The WACC for this company is computed as follows:
Weight
| | Rate
| | Product
|
|---|
60% | × | 7.1% | = | 4.26% |
20% | × | 10.5% | = | 2.1% |
20% | × | 14.2% | = | 2.84% |
WACC | | | | 9.20% |
Choice "d" is incorrect. A company would most likely use the WACC as a hurdle rate, not the after-tax cost of debt.
Choice "a" is incorrect. A company would most likely use the WACC as a hurdle rate, not the cost of preferred shares.
Choice "c" is incorrect. A company would most likely use the WACC as a hurdle rate, not the cost of common shares.
