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 an 12 percent return and can be financed at 9 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 16 percent return but would cost 18 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm’s capital structure.

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 _ _ _ _ %

Explanation / Answer

a.weighted average cost of capital =

(Weight of equity * Cost of equity )+ (Weight of debt * Cost of debt)

here,

Weight of equity =0.50..........(given that to Assume debt and common equity each represent 50 percent of the firm’s capital structure).

Weight of debt = 0.50.

Cost of debt = 9%

Cost of equity = 18%.

weighted average cost of capital =

(Weight of equity * Cost of equity )+ (Weight of debt * Cost of debt)

weighted average cost of capital = (0.50)*9% +(0.50)*18%.

= 4.5% + 9% =>13.5%.

weighted average cost of capital =13.5%

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