Royal Petroleum Co.: WACC and Project Acceptance
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Royal Petroleum 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 firm's capital structure.
a. Compute the weighted average cost of capital
b. Which project (s) should be accepted
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Solution Summary
The solution explains the calculation of WACC and using it to determine which projects should be accepted.
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a. Compute the weighted average cost of capital
Weighted average cost of capital = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity
We ...
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