Question

Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 11 percent return and can be financed at 6 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 9 percent return but would cost 15 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.)

Answer 1

Answer:

10.5%

Explanation:

WACC = weight of equity x cost of equity + weight of debt x cost of debt x (1 - tax rate)

(6% x 0.5) + (15% x 0.5) = 3% + 7.5% = 10.50%