Question

Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 8 percent return and can be financed at 5 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 16 percent return but would cost 18 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure. a. Compute the weighted average cost of capital. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Weighted average cost of capital % b. Which project(s) should be accepted? O New machine. O Piece of equipment.

Answer 1

Anticipated return okapieaot equipment81 Finaneed cast of debt Yield of neww maene Common eqty J.81 Debt and tommon eguity Tepresols eauh Sof.:0S0 So of firm's Cap ihal a) Delo weighted cabaebtxweights X 1.xSo1.2 0.025 2.5 weighted Cast of Common Shock oreguty is 8.xSo. A weightod avevage cast of copihal: 2s). +9/. weightad Auevege ost of capital s Yie ldof new machine rs16/. retuvn, uhih gqreatev than the edt of ca pi tal of we should enauve that the retuvns lanad krom the prejeut should be more thanthe WACC Thuretora new machinery ghoald be accephed So, Ist option is coneet