Question

Grouper Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $2,052,000 on March 1, $1,200,000 on June 1, and $3,007,200 on December 31. Grouper Company borrowed $1,042,720 on March 1 on a 5-year, 13% note to help finance construction of the building. In addition, the company had outstanding all year a 9%, 5-year, $2,039,800 note payable and an 10%, 4-year, $3,462,500 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

Answer 1

Answer:

The weighted-average interest rate used for interest capitalization purposes is 10.1%

Explanation:

This problem requires us to compute the weighted-average interest rate used for interest capitalization purposes. The wacc can be calculated in the following way.

          Loan Amount Outstanding                                    Weightage                                          (LOA)                                                                        (LAO/Total)

                     $ 868,933      (1,042,720/12*10)                 13.6%    

                     $ 2,039,800                                                32%

                     $ 3,462,500                                                54.4%

Total              $ 6,371,233

WAAC = 13% * 13.6% + 9% * 32% + 10% * 54.4%

WAAC = 10.1%