Question

Eric has another​ get-rich-quick idea, but needs funding to support it. He chooses an​ all-debt funding scenario. He will borrow ​$1,227 from​ Wendy, who will charge him 4​% on the loan. He will also borrow ​$1,143 from​ Bebe, who will charge him 6​% on the​ loan, and ​$630 from​ Shelly, who will charge him 12​% on the loan. What is the weighted average cost of capital for​ Eric?

Answer 1

Answer:

6.442%

Explanation:

Given:

Amount borrowed from Wendy = $1,227

Charges on loan by Wendy = 4% = 0.04

Amount borrowed from Bebe = $1,143

Charges on loan by Bebe = 6% = 0.06

Amount borrowed from Shelly= $630

Charges on loan by Shelly = 12% = 0.12

Now,

Total cost of capital = $1,227 + $1,143 + $630 = $3,000

Weight of Wendy = $\frac{\textup{Value of Wendy}}{\textup{Total Capital Value}}$

= $\frac{\textup{1,227}}{\textup{3000}}$

= 0.409

Weight of Bebe = $\frac{\textup{Value of Wendy}}{\textup{Total Capital Value}}$

= $\frac{\textup{1,143}}{\textup{3000}}$

= 0.381

Weight of Shelly= $\frac{\textup{Value of Wendy}}{\textup{Total Capital Value}}$

= $\frac{\textup{630}}{\textup{3000}}$

= 0.21

The weighted average cost of capital for​ Eric

= ∑ (weight × cost)

= 0.409 × 0.04 + 0.381 × 0.06 + 0.21 × 0.12

= 0.01636 + 0.02286 + 0.0252

= 0.06442

or

=  0.06442 × 100% = 6.442%