Question
Tim Co. can buy a piece of equipment that is anticipated to provide a 9 percent return and can be financed at 6 percent with
Tim Co. can buy a piece of equipment that is anticipated to provide a 9 percent return and can be financed at 6 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 firms capital structure at 6 percent cost of debt and 18 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? New machine should be financed or Piece of equipment should be financed?
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