DaimlerChrysler disclosed the following information relating to its long-term debt in its 2008 annual report:
• 5.18% notes/bonds
• 5.63% commercial paper
• 5.72% liabilities to financial institutions
General Motors also provides information relating to its debt in the notes to its annual report. That information is given below.
• Short-term debt, 6.5%
• Long-term debt due within one year, 4.8%
• Long-term debt due after one year, 5.8%
1. Assume that each company’s debt is distributed equally across the various categories.
Compute an average cost interest rate for each company.
2. If your answer from part (1) represented each firm’s cost of capital, what would it tell you about the kinds of projects that DaimlerChrysler can undertake as compared to General Motors?