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 14 percent but would cost 16 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 ____%

*I keep getting 28% and 1%...neither of which are the correct answer. Can anyone help?*

Explanation / Answer

Weighted average cost of capital = 0.50 * 4% + 0.5 * 16%

= 10%

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