Star has on its books amounts and specific (after tax) costs given in the table below for each source of capital,
Source of capital Book value Specific cost
Long term debt $700,000 5.30%
Preferred stock $50,000 12
Common stock equity 650,000 16
1) Compute the company’s weighted average cost of capital using book value weights.
2) Describe how the firm can use cost in an investment decision-making process.