question archive Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 6 percent return and can be financed at 3 percent with debt
Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 6 percent return and can be financed at 3 percent with debt
Subject:EconomicsPrice:2.87 Bought7
Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 6 percent return and can be financed at 3 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 13 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.)
b. Which project(s) should be accepted?
| New machine | |
| Piece of equipment |
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Solution.
a. Compute the weighted average cost of capital.
Forrmula = (Cost of Equity x Weight) + (Cost of Debt x Weight)
WACC = ( 0.15 x 0.50) + (003 x 0.50 )
WACC = 0.075 + 0.015
WACC = 0.09 or 9%
b. Which project(s) should be accepted.
Speedy Delivery Systems can accept those system which return is hgher than WACC 9%.
Therefore, Company will purchase new machine which gives 13% return.
