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 15 percent return but would cost 17 percent to finance through common equity. Assume debt and common equity each represents 50 percent of the firm's capital structure.

Compute the weighted average cost of capital

Answer 1

The WACC is :

= weight of debt * cost of debt + weight of equity * cost of equity

= 0.5*0.05 + 0.5*0.17

=0.025 + 0.085

= 11%

So, the WACC is 11%