Royal Petroleum Co. can buy a piece of equipment that is anticipated to provide a 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 19 percent return but would cost 21 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firms capital structure at 9 percent cost of debt and 21 percent cost of equity.

a. Compute the weighted average cost of capital. (Round the final answer to 1 decimal place.)

Weighted average cost of capital %

b. Which project(s) should be accepted?

multiple choice

• New machine should be financed.

• Piece of equipment should be financed.