Speedy Delivery Systems can buy a piece of equipment that is anticipated to prov

Question

Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide a return of 7 percent and can be financed at 4 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a return of 11 percent but would cost 13 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm

Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide a return of 7 percent and can be financed at 4 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a return of 11 percent but would cost 13 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm

Explanation / Answer

Weighted Average Cost of capital=Debt*weight+equity*weight

=4*50%+13*50% =2+6.5 =8.5

The weighted Average cost of capital is 8.5%

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