The ABC Company has the following capital structure:

The common stock of a company with an identical operating risk as ABC can be acquired for $1,000,000. The stockholders’ equity cash flows of the acquisition are:

This second firm has $200,000 of debt (net of any disposable assets) paying 0.06 ($12,000) per year. There are zero taxes.

Should the acquisition be accepted if the ABC returns establish the required returns?

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Debt Common stock Proportion 0.8 0.2 Cost 0.10 0.16 Weighted Cost 0.080 0.032 0.112